Dividend policy at FPL Group Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Dividend policy at FPL Group Case Study Analysis

Due to the strong financial standing and market reputation of the company; it could be perceived by market that the company would make investment in growth opportunities, which in turn would provide return in excess of required rate of return on equity, and would allow the company to signal the large dividend increase in the near future, following the continued growth in cash flows. The tax implication on dividend is higher than that of capital gain, due to which the change in dividend policy would allow the company to save money for shareholders in terms of tax amount which they would pay. The change in dividendpolicy would lead towards an excess availability of cash,which would be used for growingthe business by tapping the untapped market or business expansion, hence increasing the firm’s value. The shareholders would prefer the low payout ratio as it hints towards future growth and profitability. (Edmans, 2017).

In contradiction, the change in dividend policy would lead towardsreduced firm value in a way that the price of share would be negatively affected, which in turn would impact both shareholders as well as the company. The dividend cut announcement would allow the investors to perceive low return on invested, due to which they might move to competitors and invest in their stocks, which in turn would reduce the firm’s value.(I.M., 2015).

Given your analysis, would you recommend a buy, sell, or hold for FPL’s stock? Explain.

The short term recommendation for the FPL’s stock is hold because of the fact that the deregulation would lead towardsshort term fluctuation in the valuation of the stock, specifically in case of change in dividend policy, which tends to cause some shareholders shakeup.Whereas, the long term recommendation to the company is buy because the company enjoys strong financial position and is well positioned in the market to take benefit from thederegulation even though after the rivalry among the competitors gets intense; the company would have an increased capital expenditures, which would enable the company to supply the increased demand.

Optional: Would developments in tax policy since the time of the case changed your conclusion?

No the development in the tax policy would not change the conclusion,because on account of the implications of tax; the dividends are more valued by the institutional investors as compared to the individual, which means that the investors would be attracted to keep investing in the company’s stock to get higher dividend. Due to an increased wedge of tax (Capital Gains Tax < Dividend Tax), there is a likelihood that the yield tilt would be exacerbated, hence leading towards the higher expected before tax return................................

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