Florida Power & Light Company, Major Subsidiary Of Fpl Group ("Fpl") Dividend Policy Analysis

1873 words - 7 pages

What drives firms to pay dividends? Advantages and disadvantages.Dividends are set by the firm's board of directors and can come in the form of cash or stock dividends. Instead of retaining earnings for expansion or investment in growth opportunities, the profits of the firm are converted into dividends for the shareholders. This means that high payout ratios are often paid by mature companies with limited opportunities for more growth, while zero to low payout ratios are paid by younger firms that are expanding and investing. This ratio can be found by dividing the number of dividends by the net income. Dividends can also be classified as ordinary (paid on a regular basis), or extraordinary (paid out as a one time occurrence without commitment).While these dividends can come in cash form, they can also be offered as stock dividends. This type of dividend, however, can lead to dilution of equity and a reduction of value per share. A stock dividend is recorded as a transaction from retained earnings to equity capital. Repurchase of stock is yet another form: the firm repurchases its own stock, which, unlike dividends, is only taxed on the capital gains of the shareholders. This one time event also allows the company to put cash back in the hands of investors without making a long term commitment.Dividends also help to provide confidence in the company´s financial well being. The dividend policy can provide investors with a signal regarding the firm: if dividends are increased, for example, it can be seen as a signal that management is confident in future cash flows and believes the increased dividend can be sustained. On the other hand, if dividends are cut, it can be seen as a decrease in the firm's quality and lead to a decline in share prices.Taking this information into consideration, there are three schools of thought that argue for or against dividends: rightists, leftists, or the middle of the road school. Rightists assume no tax effects, which could make stock repurchases more attractive. They believe that dividends can add to a firms value and generally prefer high dividends because of distrust of management and prefer to decide on reinvestment with retained earnings instead of leaving the decision to managers. The leftists are mainly concerned with taxes; if there is a tax benefit for capital gains over dividends, the company should retain earnings or buy-back shares instead of distributing dividends. However, pension funds are tax exempt and in some instances dividends may be taxed less than capital gains. The middle of the pack school believes that the company's dividend policy does not affect firm value, and that the policy is affected by the structure of the firm's shareholders.Company's BackgroundFlorida Power & Light Company, major subsidiary of FPL Group ("FPL") was formed in 1925 through the consolidation of numerous electric and gas companies. The company enjoyed steady growth until the 1970s when rising fuel costs and...

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