Term Paper: FPL dividend policy analysis

Pages: 5 (1375 words)  ·  Style: Let the writer choose  ·  Bibliography Sources: 17  ·  Level: Master's  ·  Topic: Finance  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] However, for the company, such a policy can create an obligation, because shareholders expect a certain dividend, even if the dividend ends up being greater than the earnings per share. There have been cases where a company will pay more in dividends than it made simply to avoid having its investors sell en masse as the result of a dividend cut.

Some companies might also choose to utilize a hybrid approach, where a certain amount of earnings are earmarked for the dividend, but then there also would be a discretionary component. Typically, the amount that the company is expected to pay will be significantly below the EPS, at a level that the company will surely hit. The variable component allows shareholders to enjoy good years, while the "fixed" component (which isn't really fixed) provides some downside protection.

Choosing the Right Dividend Policy

Companies will typically aim for a dividend policy that best reflects the needs of the shareholders. The shareholders in NextEra are largely institutional, and they use the company as part of their utilities or energy portfolio. This component of most portfolios exists to provide stability. Utilities are an inherently stable business. They have consistent revenue streams, in the form of monthly bills, and these can be quite predictable year-over-year, with the utility having the ability to closely track changes in usage patterns. New construction is the key driver of growth – FPL knows that a new building or subdivision is going to generate a certain amount of additional demand for its business.

Businesses that have stable revenues often prefer to have stable dividend payouts. The residual approach works better for companies that have relatively volatile finances – the dividends are one of the ways that the company would reduce financial risk, essentially offloading that risk to the shareholders. Stable businesses are more suited to the stability dividend policy. With stable cash flows, NextEra is well-suited to the stability dividend policy, which allows it to attract investors that are seeking stability. There are still some risks unique to the business – the risk of hurricanes being a big one – but overall this is a stable business that can reasonably promise a payout each year to shareholders, and that payout is one of the reasons why they invest in NextEra and other utilities.

Recommendations

The current approach is to target a percentage of earnings, 55%, as the dividend payout. This means that NextEra seeks to rewards its investors mainly with dividends, more so than share price growth. This approach suits the company's business and stable cash flows. Furthermore, because this has been the dividend policy for many years, the 55% approach also fits the needs of investors.

The policy has been conveyed clearly to the shareholders, so that they know what to expect. The amount of their dividend is going to be correlated with earnings per share. When EPS declined in 2012 and 2013, the amount of dividend did not, however. This highlights one of the components of stability pricing for dividends. The shareholders doubtless had an expectation of a particular payout, and the company has typically been conservative in its estimates, leading to most years being below 55%. Consistent underperformance versus the stated goal seems like it would disappoint shareholders, so there is a strong need for the company to either declare slightly higher dividends, or to simply off up a range for its dividends, rather than a finite number.

That said, the general dividend policy is reasonable, and suits the business, as well as the needs of the investors, who know that they are getting a company whose total payout is comprised mainly of dividends. As long as the company continues to be transparent with respect to its dividend policy, so that the shareholders know what to expect, the shareholders can simply watch for changes in revenue or profit as an indicator of what their dividends, and therefore the expected future value of their shares, will be.

Thus, no change is recommended to the dividend policy. The company's policy appears to be aligned with its needs. The number might have… [END OF PREVIEW]

Policy Analysis Governments and Organizations Create Policies Discussion and Results Chapter


Dividend Policy Term Paper


Policy Analysis on Nutritional Programs for K-12 Grade in California Term Paper


Policy Analysis Family Impact Analysis Principle Essay


Policy Analysis on the Oregon Death With Dignity Act Term Paper


View 1,000+ other related papers  >>

Cite This Term Paper:

APA Format

FPL dividend policy analysis.  (2017, October 19).  Retrieved September 17, 2019, from https://www.essaytown.com/subjects/paper/fpl-dividend-policy-analysis/2645082

MLA Format

"FPL dividend policy analysis."  19 October 2017.  Web.  17 September 2019. <https://www.essaytown.com/subjects/paper/fpl-dividend-policy-analysis/2645082>.

Chicago Format

"FPL dividend policy analysis."  Essaytown.com.  October 19, 2017.  Accessed September 17, 2019.
https://www.essaytown.com/subjects/paper/fpl-dividend-policy-analysis/2645082.