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Dividend Policy At FPL Group

The FPL Group was Florida’s electric utility group and the fourth largest in America. The FPL Group had annual revenues of exceeding $5 billion. b. Summarize the key elements of other relevant firms’ financial policies and compare it with FPL’s We are commenting on other firms’ financial policy from a dividend and capital structure perspective in relation to how it compares to Florida Power & Light Company (FPL).

FPL had a very shareholder friendly financial policy. The company paid regular and high dividends and also bought back shares regularly. The company’s payout ratio was consistently high, ranging from 60% to 80%. This is in contrast to other companies in the utility sector which typically have much lower payout ratios. FPL’s capital structure was also very conservative, with debt accounting for less than 30% of the total capitalization.

At nearly 90%, FPL’s dividend payout ratio is significantly higher than most power utilities in America, which average around 80%. Additionally, when compared to other utilities operating in the same geography as FPL (southeastern America), this number appears even more significant since the average for these companies is only 77%. Lastly, it’s worth noting that FPL has increased its dividends for 47 consecutive years.

High dividend payout ratios usually imply that a company is not reinvesting enough in its business and is instead returning most of its profits to shareholders in the form of dividends. This can be a good thing or a bad thing depending on the circumstances. If a company has a high dividend payout ratio because it is very profitable and cash flow positive, then it might make sense for the company to return most of its profits to shareholders.

On the other hand, if a company has a high dividend payout ratio because it is not generating enough cash to reinvest in its business, then this could be problematic in the long run as the company will eventually erode its competitive advantage and fall behind its peers.

In FPL’s case, the dividend payout ratio is high because the company is very profitable and cash flow positive. The company has a lot of excess cash that it does not need to reinvest in its business. This is a good thing for shareholders as they are receiving a large portion of the company’s profits in the form of dividends.

FPL’s high dividend payout ratio is also sustainable in the long run as the company has a strong competitive position in the markets it operates in. The company has a low cost structure relative to its peers and this gives it a significant competitive advantage. FPL also has a diversified generation mix which reduces its exposure to fuel price volatility. These factors give FPL confidence that it can continue paying out a high percentage of its profits to shareholders in the form of dividends.

The FPL must consider the following issues when choosing how much cash to distribute to investors:

-The power landscape is undergoing significant regulatory changes.

-The power sector is rapidly deregulating, which could lead to increased competition soon.

-Retail wheeling poses an immediate threat that would deregulation of the power distribution business.

The FPL Group has to take a strategic call on how much cash to distribute to investors given the regulatory changes in the power sector. The options available to the company are

– Retain cash for operations

– Pay out special dividends

– Buy back shares

– Invest in new projects

– Strengthen the balance sheet

Each of these options have their own merits and demerits and it is up to the management to make a decision taking into account all the factors. Some of the key considerations that the management would have to take into account include

– The net present value of future cash flows

– The cost of debt and equity

– The regulatory environment

– The competitive landscape

– The company’s appetite for risk

At the end of the day, the management would have to make a decision based on what is best for the company and its shareholders.

Even though it’s highly unlikely that retail wheeling will be introduced to Florida in the near future, considering the state’s electricity regulatory commission has yet to consider its implementation, it’s still a distinct possibility in the not-so-distant future based on current industry trends.

The FPL Group is one of the largest electric utility holding companies in the United States. Headquartered in Juno Beach, Florida, its principal subsidiaries are Florida Power & Light Company, which serves more than 4.5 million customer accounts in Florida, and NextEra Energy Resources, LLC, which together comprise the largest generator of renewable energy from the wind and sun in North America.

In 2017, FPL’s total revenue was $17.2 billion. The company has approximately 12,700 employees.

FPL is a subsidiary of NextEra Energy (NYSE: NEE), a clean energy company widely recognized for its efforts to reduce emissions from power generation and invest in renewable energy resources. NextEra Energy is also the parent company of Gulf Power Company, which serves more than 460,000 customers in eight counties along the Northwest Florida Gulf Coast, and NextEra Energy Partners, LP (NYSE: NEP), a growth-oriented limited partnership formed by NextEra Energy to own, operate and develop a diverse portfolio of clean energy projects.

The Modigliani-Miller theory suggests that a company’s dividend policy has no effect on its asset value. Choosing between dividend payments or share repurchases shouldn’t impact the stock price, since both methods are distributing cash to shareholders. Although, this is only in the Modigliani-Miller world where there are no expenses correlated with taxes or financial bankruptcy.

The FPL Group, however, is subject to both of these costs. Taxes are a big cost for the FPL Group. If the FPL Group pays out dividends, they will be subject to double taxation. The first tax is a corporate tax on the profits of the company. The second tax is a personal tax on the shareholders when they receive the dividend payments.

The FPL Group can avoid this double taxation by repurchasing their own shares instead of paying dividends. When the company buys back its own shares, there is only one level of taxation: the corporate tax on the profits of the firm.

However, share repurchases can also be costly if they lead to financial distress. If the FPL Group borrows money to repurchase shares, and the share price then falls, the firm may be unable to repay its debt. This can lead to bankruptcy and the loss of shareholder value.

Thus, the Modigliani-Miller dividend irrelevance proposition does not hold true in the real world where taxes and financial distress costs exist. The FPL Group must carefully consider these costs when making decisions about their dividend policy.

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