Transcript 投影片 1

Dividend Policy at FPL
Group
Synopsis
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A Wall Street analyst has just learned that FPL
Group (the holding company for Florida Power and
Light, the country’s fourth largest electric utility)
may decide to freeze its dividend at $2.48 per share
or possibly cut the dividend at the company’s
upcoming annual meeting.
The decision not to increase the dividend will end a
47-year streak of annual dividend increases—the
longest streak among utilities and the third longest
streak among publicly traded U.S. companies.
In response to the news, FPL’s stock price is down
6%. The protagonist, Kate Stark, must decide
whether to revise her investment recommendation
on FPL in light of this new information.
Background behind FPL’s decision in dividend?
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In 1992, federal regulators introduced wholesale
wheeling and, by mid-1994, state regulators in 23
states are considering retail wheeling proposals.
When the California regulators released their retail
wheeling proposal, the three largest utilities in the
state lost a combined $1.8 billion in market value.
S&P Electric Utilities Index has declined more than
20% since September 1993. While much of this can
be attributed to the increase in interest rates, some
portion of the decline is due to the effects of
deregulation.
If you are FPL CEO, what will you do?
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Take a vote!
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Increase dividend
Remain the same! ($2.48)
Cut dividend
What are your reasons behind your
votes?
Why FPL want to increase dividend?
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Meet market expectation.
Signal good earnings perspective.
Free cash flow hypothesis.
Why FPL want to decrease dividend?
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To signal worsening industry prospect. (not
much so for FPL)
Increased competition leads to increased
volatility in earnings, makes a high payout
ratio unlikely to maintain.
Other concerns than signaling. Taxes,
transaction cost, or agency conflicts.
FPL’s competitive advantages
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FPL’s service territory, eastern and southern Florida,
country’s fastest growing markets: FPL expects
annual growth of 2.7% (the U.S. average of 1.8%).
FPL’s customer mix is also a competitive advantage
since industrial sales represent only 4% of total
sales compared to an average of 21% for the others.
According to the retail wheeling proposals, having a
low percentage of industrial customers limits FPL’s
risk to the threat of competition.
S&P ranked FPL’s competitive position among the
top 10% of investor-owned utilities.
FPL’s financial strength
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FPL’s cash flow is improving due to increasing net
income and declining capital expenditures.
FPL will have $601 million in cash before common
dividends in 1998 compared to negative $832 million
in cash flow after dividends in 1992. By slowing
dividend growth to 1% per year, FPL can fund its
dividend internally by 1996 and reduce its payout
ratio to below 80% by 1998.
This strong future cash flow makes it unlikely that
FPL will cut its dividend. Indeed, according to the
analyst, FPL views earnings growth as a possible
solution to the high payout ratio problem.
FPL’s competitive disadvantages?
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FPL is a high cost utility in a commodity
business. FPL’s generating and transmission
costs are significantly higher than most of its
competitors.
Because the competitors currently have excess
generating capacity (see the load factor and
capacity margins) and sufficient transmission
capacity for the next several years, they pose a
serious threat to FPL’s future profitability.
Does signaling play a role in FPL’s
dividend policy?
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What FPL tries to signal? Better? Or worse?
Improved competitive edge and financial
strength  increase dividend.
Worsening industry profitability  cut
dividend.
The major problem with cutting the dividend
is the likelihood of severe market reaction.
Both Consolidated Edison and Sierra Pacific
experienced significant share price declines
in the wake of dividend cuts.
Taxes and dividends for FPL
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Non-tax paying institutions (30%) generally don’t care
whichever capital gains or dividends.
For individuals (52%), between 1986 and 1993, they were
taxed at same rates. More recently, tax codes favor
capital gains: the tax rate on long-term capital gains
peaks at 28% while the rate on dividend income can go
as high as 39% for high income individuals.
Corporations, which own approximately 5% of shares,
can exclude a substantial portion of dividend income
from taxes. If they own less than 20% of a company’s
stock, they can exclude 70% of dividend income; if they
own from 20% to 80% of the stock, they can exclude
80%; and if they own more than 80%, they can exclude
100%.
The fact that FPL has a relatively high dividend yield
would seem to indicate that the tax disadvantage of
dividends does not concern its investors.
Transactions Costs
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One can see that operating cash flows were
approximately equal to investing cash flows; long
term debt issuance was approximately equal to
debt retirement; and stock issuance was
approximately equal to the payment of common
dividends.
To pay the dividends, FPL issued 55 million shares
of common stock worth $1.9 billion.
The investment banking fees for the issuances,
estimated at 3% of the total amount issued, would
equal $60 million.
As a general rule, a firm should not issue equity to
pay dividends because it results in a deadweight
loss for investors.
Agency costs
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Managers own only 0.1% of stock.
Firm is to ratify a new executive compensation
plan, which will emphasize net income and reduce
the extent to which bonuses are paid in stock. 
agency conflict
If Broadhead were to pursue new ways to increase
net income, he might well reduce the dividend. FPL
could simply invest the $150 million of savings
from cutting the dividend at 5% to yield $7.5 million
per year. This extra income would increase net
income by 1%—significant in an industry that is
growing at only 2% per year.
What Will Broadhead Do?
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May 9: FPL announces new financial strategy
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32% reduction in quarterly dividend
Dividend payout targeted at 60-65%
Repurchase 10 million shares over 3 years
Reduce debt levels
Move annual dividend announcement to February
Broadhead’s explanation for the cut that the firm
needs more financial flexibility to deal with future
competition. For electric utilities industry which
generate large amounts of free cash flow,
financial slack may not be such a good thing.
Stock price falls $4.375 to $27.50 [down 13.7%],
Stock price is down 22.3% since April 29
Does a cut in dividend meet with
capital market’s expectation?
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FPL’s competitive position and future cash flow
seems to indicate that FPL may increase its
dividend or, at a minimum, hold the dividend
where it is.
FPL’s shareholders clientele seems to be satisfied
with current payout dollar and ratio.
Investors view the dividend cut as a bad signal
regarding future profitability because profitable
firms rarely cut their dividends.
What should Stark recommend to
her clients regarding FPL’s stock—
buy, sell, or hold
The aftermath
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FPL cut dividend, and it’s stock price dropped 14%
in one day
The recovery of the stock price begins immediately
after the initial decline as analysts began to issue
“buy” recommendations.
FPL buy back shares after the cut in dividend. The
buyback in turns reduce shares, and increase EPS,
which is good for shareholders.
Investors had lost $0.80 per share in dividends.
The FPL’s buyback program has posted EPS
growth of 5.6% over the year ($2.91 in 1994 versus
$2.75 in 1993).