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... e value of more than $ 27 billion, ($ 16. 4 billion in equity market capitalization and $ 10. 7 billion in debt and preferred stock). One conclusion from this study is that FPL was a special case in terms of the results when it announced a dividend cut and a stock repurchase program. FPL was a company that was very strong, and changed its dividends not due to hurt earnings, but an anticipation of the change in the industry. Comparing the cumulative net returns of FPL and the sample shows this. The results show that FPL's returns were stronger than the sample up to announcement, weaker on the day of the announcement, and recovered more than the sample after the announcement.
This information lead me to believe that FPL was a strong company that had a clientele switch hurting the stock price on the announcement date. Perhaps investors initially overreacted, but with the positive signal from the stock repurchase, ultimately investors realized that FPL was still a strong firm. Subsequently, a new clientele of investors came in to restore the stock price to its pre-announcement level. The sample had different results as shown by the statistically significant negative return present around the announcement that was not recovered.
This shows that the market did not take the announcement for the stock repurchase seriously, and that the effect of the dividend drop was a permanent share revaluation. This concludes that on average, the announcement of a dividend drop and a stock repurchase program results in a permanent drop in the stock price. Also, since the drop in stock price is permanent, the explanation is that the signal of the dividend overpowers the signal from the stock repurchase and not the switch of the clientele. The results also indicate that the rest of the companies in this study were financially weak and may have been trying to appear to be in the same situation as FPL.
In my opinion, another study with many companies in the sample should be conducted to generalize the expected results of companies that simultaneously announce a dividend cut and a stock repurchase program. Also, companies who do take on these actions should be looked at on a case by case basis to estimate the effects on the stock price. 10. General Scheme of Fpl's Dividend in 1994 i. FPL Group Incorporation Parent of Florida Power and Light Company. Floridas largest electric utility, and 4 th largest electric utility in the U. S. (industry Leader) ii.
Considers to Cut Dividends in 1994, after 47 years of uninterrupted increase in dividends. Increase in competition. Current Payout Ratio of ~ 90 % not optimal for shareholders (payout ratios in the electric utility industry range from 60. 8 % to 106. 2 % in 1994). iii. Regulatory changes 1992: Wholesale wheeling -Utility A can sell power to Utility B through Utility Cs transmission system. 1994: Retail wheeling - Utility can sell power to Utility Bs customers using Utility Cs distribution system.
iv. Fpl's Competitive Position. California utilities lost about 8 % of their market values. FPL services eastern and southern Florida. - Among the fastest growing markets (2. 7 % vs 1. 8 % rest of U. S). - Location Limits competitive threats. Industrials account for only 4 % of total power sales High cost producer - Power Generation. - Power transmission Competitors have excess generating power S& P had recently upgraded Fpl's senior debt rating to A+.
Competitive Position: top 10 %. v. Fpl's Payout Policy Increased dividend every year for 47 years. Increases have been getting smaller: 9. 6 % in 1985, 1. 6 % in 1993. Majority of returns to shareholders are in terms of dividends. Payout ratio 60 - 70 % before 1989, 90 % in recent years.
Smooth dividends despite volatile earnings. vi. Fpl's Payout Policy Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Net Income ($/share) 2. 62 3. 11 2. 90 3. 10 3. 42 3. 12 - 2. 86 1. 48 2. 65 2. 30 Dividends ($/share) 1. 77 1. 94 2. 02 2. 10 2. 18 2. 26 2. 34 2. 39 2. 43 2. 47 Percentage increas Payout Ratio 67. 6 % 62. 4 % 69. 7 % 67. 7 % 63. 7 % 72. 4 % N/A 161. 5 % 91. 7 % 107. 4 % vii. Majority of Returns to Shareholders Are in terms of Dividends.
Expected Return = Dividend + Expected Capital on equity Yield gains Expected Return 14. 8 7. 3 %) on Equity Dividend Yield = Dividend per Share = $ 2. 47 Average Share price $ 34 1 viii. Competitors Payout Ratio FPL Group 91 % Carolina Power 74 % Duke Power 68 % Florida Power 87 % SNANA Corporation 74 % The Southern Co. 75 % TECO Energy 73 % ix. FPL Cash Needs in the Future Net Income is expected to Increase. Capital Expenditure is expected to decline. x. Cash Flow Forecast (1994 1998) Year 1992 1993 1994 1995 1996 1997 1998 Net Income Depreciation 467 429 527 557 576 596 615554 598 665 711 741 778 795 Sources of Cash 1, 021 1, 027 1, 192 1, 268 1, 317 1, 374 1, 410 capital Expenditure Maturing debt Dividends 1, 270 1, 337 901 831 743 769 624 152 11 2 81 101 4 185 431 461 466 471 475 480 485 Users of Cash 1, 853 1, 809 1, 369 1, 383 1, 319 1, 253 1, 294 Free cash flow - 832 - 782 - 177 - 115 - 2 121 116 xi.
Dividend Recommendation for FPL Arguments in favor of dividend cut Taxes FPL has diverse group of shareholders Individuals - 65 % Tax-exempt institutions - 30 % Corporation - 5 % Share price is at a one-year low (favors repurchase) Transaction costs FPL pays dividends and raises equity (3 % underwriter fee) Corporation position Arguments in favor of continuation of dividend policy Dividend clientele - Dividend yield is very high. Current investors are probably o. k. because otherwise they would not hold Fpl's stock. Signaling - Consolidated Edison (1974) and Sierra Pacific (1992) experienced significant Price declines when dividends were cut. - 47 -year old dividend policy. Probably severe market reaction.
Agency problems - Managers own only 0. 1 % of Fpl's equity. - New compensation scheme based on net income. - Diversification efforts in 1985 / 86. xii. Fpl's Dividends Decision in 1994. May 9, 1994: FPL announces new financial strategy - 32 % reduction in quarterly dividend - Dividend payout targeted at 60 - 65 % - Repurchase 10 million shares over 3 years - Reduce debt levels Stock price falls to $ 27. 50 (down 22. 3 % since rumors of dividend cut surfaced). xiv. Conclusion: Evaluated dividend decision at FPL Group - taxes, transaction costs, competitive position - Dividend clienteles, signaling, agency costs, (current share price).
Combine dividend cut and share repurchase - Reduces negative signaling effect of dividend output. - Increase returns to shareholders to make opportunistic use of signaling effect Timing matter Transparency pays off Case highlights the trade-off between short-run and long-run share price maximization.
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Research essay sample on Case Study And Statistics On Fpl Energy
