Fpl Harvard Business Casw Essay Example for Free

Fpl Harvard Business Casw Essay The fourth largest electric utility company in the United States and the largest electric utility in Florida is the FPL Group, which formed in 1925 from the consolidation of several gas and electric companies. FPL as a company continued to grow after 1925 because the ever increasing Florida population demanded more and more electricity. This trend continued until the 1970s when operating problems, and the rising cost of fuel and construction, caused a reduction of the company’s profitability. To address this issue, then Chairman Marshall McDonald, decided to make four major acquisitions: Colonial Penn Life Insurance Company, Telesat Cablevision Inc. , CBR Information Group Inc. , and Turner Foods Corporation. FPL also attempted to improve operations by employing 1,700 teams for quality control to find ways to improve operations. This notion lead FPL to be recognized as â€Å"one of the best-managed US corporations,† when the 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 new 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 share or even potentially reduce the dividend at FPL’s annual meeting. Kate had previously valued FPL with a â€Å"hold† recommendation three weeks earlier with the belief that FPL will either keep its dividend payout at $2. 48 or slightly increase it. However, with the news of this new rumor about FPL dividends, FPL stock price fell by 6% because a freeze of the dividend would mean that FPL would end a 47-year streak of ann ual dividend increases. Now Kate is reconsidering her â€Å"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 current 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 stock. Two theories of dividends come up with the FPL Group. The first theory is the Signaling Hypothesis and the second theory would be the Clientele Effect. The Signaling Theory is essentially the theory that managers of a certain company have better information and are more informed internally about a firms future prospects than the public stockholders. Future dividends are paid out of future profits, 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 tend to increase or decrease. The second theory relevant to the FPL group dividend policy is the Clientele Effect. Different clienteles of stockholders favor 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 current clientele will leave and a different clientele will 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. There are two important issues that are facing the FPL Group in the May of 1994. The first is the concerns of potential competition resulting from industry deregulation and the second is the reexamination of a high dividend payout ratio already previously noted. The arrival of retail wheeling from the National Energy Policy Act of 1992 threatens to change the shape of the entire electric utilities industry. The Florida Public Service Commission is not currently considering a retail wheeling proposal, but 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 ensure 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 FPL’s perspective because they need the extra capital to be able to fund new projects if the new wheeling regulations 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 isn’t 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 stability while protecting future profitability. A lower payout ratio would allow FPL to have the capital necessary 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 dividend 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 positive 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 â€Å"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. FPL’s stock will fall with the announcement 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 â€Å"hold† on to the stock to not take a loss, and continue to â€Å"hold† the stock because the FPL group provides sound evidence that the stock price will continue to rise in the near future. References: Welch, 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 analysis–a case study of Oxford Landing from â€Å"vine to dine†. Supply Chain Management: An International Journal 17.1 (2012): 68-77. Pitman, Glen, et al. QFD application in an educational setting. International Journal of Quality ; Reliability Management (2013). Plant, Robert, Leslie Willcocks, and Nancy Olson. Measuring e-business performance: towards a revised balanced scorecard approach. 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