Dividend Policy Analysis-Florida Power & Light

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Corporate Finance Columbia University Prepared by: Bachhawat, V ivek Hadgis, Demetrios Tsoka, Kater ina Uccellin i, Jessica Professor Charisa Asbury Dividend Policy: The FPL Group, Inc. (“FPL”) I. Executive Summary A. Current Situation: In the spring of 1994, Merrill Lynch’s utilities analyst downgraded their investment rating for the FPL Group, the parent company of Florida Power & Light, Florida’s largest electric utility. The Merrill Lynch analyst downgraded FPL because he/she believed FPL was on the verge of cutting its dividend for the first time in 47 years. Reacting to this news release, Kate Stark, an electric utilities analyst at First Equity Securities Corporation, faced the decision whether or not to revise her own current ‘Hold’ recommendation on FPL’s stock. Following chairman Marshall McDonald’s retirement in 1989, FPL experienced a streamlining of its businesses and operations under his successor, James Broadhead. At FPL, Broadhead implemented a commitment to quality and customer service, increased its focus on the utilities industry, expanded capacity, and improved its cost position. In the 1990’s, Broadhead sold off several of FPL’s non-utilities businesses.1 In May, 1994, one of the most important issues confronting the FPL Group was the decision whether or not to decrease their dividend payout ratio as a result of an evolving competitive market place. B. Competitive Position: Chairman James Broadhead’s vision for the electric utilities business was one of free and open competition, and he intended to better position FPL for such a marketplace.2 Initially, under chairman Marshall McDonald, FPL underwent a period of diversification and expansion in the 1970’ and 80’s, acquiring major companies in various industries, such as real estate, insurance, and information services.3 Later, under Broadhead, FPL reversed

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