Fpl Harvard Business Casw Essay Example for Free

Fpl Harvard Business Casw assayThe fourth largest electric value company in the United States and the largest electric utility in Florida is the FPL Group, which form in 1925 from the consolidation of several gas and electric companies. FPL as a company continued to move around after 1925 because the ever increasing Florida population demanded more and more electricity. This trend continued until the 1970s when ope rating(a) problems, and the rising cost of fuel and construction, caused a reduction of the companys profitability.To address this issue, then chairwoman Marshall McDonald, decided to make four major acquisitions Colonial Penn Life Insurance Company, Telesat C sufficientvision Inc. , CBR cultivation Group Inc. , and Turner Foods Corporation. FPL also attempted to improve operations by employing 1,700 teams for select control to happen upon ways to improve operations. This notion lead FPL to be recognized as matchless of the best-managed US corporations, when t he quality control teams found ways to improve efficiency within FPL by decreasing customer complaints by 60%, and decreasing downtime operations by 12%.Despite these enhancements, FPL still had company troubles to include problems with a nuclear plant, demand was growing at a faster pace in the 1980s than expected, one of their acquisitions had lost $250 million since being acquired, and employee morale was low due to all the in the buff management regulations. Kate Stark, the electric utilities analyst at First Equity Securities Corporation came across a decision involving this Florida electric utility company, FPL. The decision begins with the buzz that FPL may decide to freeze its dividend at $2. 8 per sh atomic number 18 or hitherto capabilityly reduce the dividend at FPLs annual meeting. Kate had earlierly valued FPL with a hold recommendation three weeks earlier with the belief that FPL leave alone either keep its dividend pay reveal at $2. 48 or meagerly increase it. However, with the news of this new rumor about FPL dividends, FPL hackneyed price fell by 6% because a freeze of the dividend would mean that FPL would end a 47-year streak of annual dividend increases. Now Kate is reconsidering her hold rating and contemplated issuing a new updated report to revise her investment recommendation.It is now to decided how a change, if any, to the up-to-date dividend policy would affect shareholders, which option would have the greatest benefit to the shareholders and FPL, and what should be advised to investors with regard to FPL railway line. two theories of dividends come up with the FPL Group. The first theory is the Signaling Hypothesis and the second theory would be the business enterprise Effect. The Signaling Theory is essentially the theory that managers of a certain company have better cultivation and are more informed internally about a firms hereafter prospects than the public stockholders.Future dividends are paid out of future pro fits, so any change in dividends to be paid is viewed as an indication of what future profits are going to be. Thus, when dividends are increased or decreased, stock prices function to increase or decrease. The second theory relevant to the FPL group dividend policy is the Clientele Effect. Different business concerns of stockholders respect diverse dividend payout ratios. Different firms also have altering ways of calculating and paying out dividends.Thus, when a firm switches its payout ratio a circulating(prenominal) clientele result leave and a different clientele depart join. The rule of thumb is that if more investors leave or leave faster than a new clientele could replace them, then there could be a temporarily depressed share price. on that point are two important issues that are facing the FPL Group in the May of 1994. The first is the concerns of likely competition resulting from industry deregulation and the second is the reexamination of a high dividend payout ra tio already previously noted.The arrival of retail revolve from the National Energy Policy Act of 1992 threatens to change the shape of the built-in electric utilities industry. The Florida Public Service Commission is not currently considering a retail roll proposal, and the current trend in the industry is to increase the competition. The implementation of such a proposal, however, would expose FPL to numerous competitors and possible losses, for example, as shown in California California had already implemented a retail wheeling program and the program had a severe adverse effect on the three major utilities in that state.Competing with rival utilities must now be a primary concern of FPL and FPL now needs to delay that it has the ability to meet the challenge of competition from both in state and out of state providers. The current payout ratio is too high from FPLs perspective because they need the extra capital to be able to stock new projects if the new wheeling regulat ions were to be implemented. FPL just could not afford to pay out 90% of its earnings given the possible need to expand in the face of new competition.Although FPL has had success in the past and present, the threat of retail wheeling means FPL must hold on to cash. continuing a high payout ratio just isnt feasible because of the severe challenges FPL would face if the retail wheeling plans were put into action. FPL must be prepared for this eventuality, so FPL needs the funds to ensure financial perceptual constancy while protecting future profitability. A lower payout ratio would allow FPL to have the capital infallible to hedge itself from losing big to increasing competition. The problem now lies in the confidence of investors if FPL were to cut dividends.It is to believe that FPL will indeed cut their dividends or freeze them at the least to insure financial stability in times where the future is uncertain. The additional retained earnings from a reduction or halt of divide nd payout will open opportunities for FPL to compete in a new open market, reduce their debt ceiling for added cash to fund and expand new opportunities for growth and allow for a more industry standard payout ratio for future growth. This may not at first be what a shareholder would want to see, but the affirmative outlook for the long run, outweigh the negative impacts of the short run.As a result of this analysis, FPL looks to be a very reliable investment for the future with a positive upside for future growth potential however the only drawback would be how much exactly a dividend cut would actually affect the initial stock price, which is hard to tell. Kate Stark should absolutely keep her hold recommendation on FPL stock for the previous conceived reasons. There are no notions to believe FPL is in any urgent financial trouble or that there will be a drastic dividend cut.FPLs stock will fall with the promulgation of a dividend freeze or reduction it is just a matter of how much. There is an upside potential for FPL and there is evidence that they will be prepared for more competition. The FPL stock price again will drop initially with the announcement of a dividend freeze or reduction, but hold on to the stock to not take a loss, and continue to hold the stock because the FPL group provides sound evidence that the stock price will continue to rise in the near future.ReferencesWelch, Jonathan B., and Anand Venkateswaran. The dual sustainability of wind energy. Renewable and sustainable Energy Reviews 13.5 (2009) 1121-1126.Soosay, Claudine, Andrew Fearne, and Benjamin Dent. Sustainable value chain analysisa case study of Oxford arrive from vine to dine. Supply Chain Management An external Journal 17.1 (2012) 68-77.Pitman, Glen, et al. 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