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Dividend Policy at Fpl

Essay by   •  August 2, 2011  •  Essay  •  713 Words (3 Pages)  •  1,606 Views

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Why do firms pay dividend?:

- Firms pay dividends to balance their asset and capital structures when their earnings outstrip their investment opportunities.

- Firms pay dividends to mitigate agency problems when they have excess earnings.

Cons of cash dividend payment:

- A dividend policy is irrelevant or has no impact on the firm's value because investors have the ability to create "homemade" dividends.

- Little to no dividend payout is more favorable for investors. This is because taxation on a dividend is higher than tax on capital gains.

- Dividends are taxed as ordinary incomes

- Dividends can reduce internal source of financing

- Once established, dividends cuts are hard to make without adversely affecting a firm's stock price

Pros of cash dividend payment:

- Cash dividends can underscore good results and provide support to stock price

- Dividends may attract institutional investors who preferred some returns from dividends

- Stock price usually increases with the announcement of a new or increased dividends

- Dividends absorb cash flow so they may help reduce agency problems

Major issues of FPL in 1994:

- Negotiation between FPL and FERC (Federal Energy Regulatory Commission) to settle the lawsuit against FPL for changing excessive rates and denying fair access to its transmission system.

- Lower investment rate due to the fact that FPL probably does not raise dividends as discussed

- Suggestion of dividend cuts by FPL's managers

- FPL's stock price has fallen by 19.6% while the S&P index has decreased by 22.1%

- Rising interest rate and increasing competition in electric industry

From investors' perspective, the current payout ratio is appropriate to some extent:

- FPL's current payout ration = cash dividend/net income = 461693/248749 = 107.7%. According to the exhibit 9, FPL has the highest payout ratio in comparison to other electric utilities in the same industry.

- For institutional investors who hold 36.9% of FPL's total common stocks, this payout ratio may be appropriate because they likely prefers high payout ratio in seeking for high earnings from their investment. If FPL tries to maintain this ratio, it

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