Executive Summary

Statement of the Problem
On May 5, 1994 Kate Stark an electric utility analyst at First Equity Security Corporation was faced with a decision involving Florida Power Light Company, (FP&L). FP&L is a strong utility company that has posted increased dividend returns over the last 47 years. The average return from 1984-1993 is $ 2.20. In the previous three weeks FP&L stock was issued a “hold” recommendation by Ms. Stark based on the assumption that its dividend payout would either increase, or remain at $ 2.48. Today however, Merrill Lynch downgraded FP&L stock based on management’s concern with excessive pricing of stock in an industry facing increasing risk. As a consequence the stock dropped by 6% and now Kate must decide to keep the original “hold” recommendation or to make a revision to “buy,” or “sell.”
Discussion
FPL is currently unprepared for the final stages of electric deregulation. A possible solution for FP&L to remain competitive is to grow out of its payout ratio by slowing the dividend growth rate to 1% starting in 1995. A 1% growth rate would lower FP&L’s payout ratio as long as the earnings increased faster than the shares. The current payout ratio for 1994 is approximately 107%. Industry average for 24 major companies is 80%. The 1% fixed rate would be beneficial to FP&L because by 1997 the ratio would be at 80% and at 79% by 1998. The net effect would mean more cash flow to handle its operating expenses and maturing debt. Conversely if FPL values the 47 year streak of increasing dividends it will look for other options.
If FPL does value the 47 year streak the company may seek to hold its dividend at$ 2.48 or increase it slightly. By holding the dividend at $ 2.48 FP&L could have its payout ratio under 80% as early as 1997. Furthermore if the company chooses to raise the dividend slightly to $ 2.49 than the payout