Tarun AswaniFPL Case ReviewThe Investment Rating Essay

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Tarun Aswani

FPL Case Review

The investment rating of FPL has recently been downgraded after talks of cutting dividends for the first time in 47 years were announced. This was due to a streamlining of its businesses and a new commitment to quality and customer service that would come from focusing on the utilities industry. Furthermore, this potential decrease in the dividend payout ratio would be a result in an evolving competitive market place. FPL has less room o grow than competitors as suggesting by the capacity margin of 8.6%. It is recommended that FPL should reduce their payout ratio to 60%. This lower ratio would put FPL in a better position in the future to grow at a faster rate than their competitors as this industry has recently been deregulated. In this scenario there are advantages and disadvantages to weigh in on. In terms of shareholders, this reduction in the payout ratio would reduce the taxes paid as dividends are taxed more than capital gains. In terms of the company, the firm will be able to retain more of their earnings instead of paying them out in the form of dividend. Furthermore, FPL’s divined policy is too high at 90%. A reduction in the payout ratio held to reduce this exposure to increased industry risk, including market volatility and deregulation. In terms of disadvantages there will be a negative market reaction to this reduction. This is because this lower dividend police will be a signal to the market and in turn, the stock…