ts high payout ratio, why choose to cut its dividends instead? It was not clear what the group was intending to do with the cash in the case of a dividend cut. The market does not usually respond very well to a dividend cut, two examples have been given in the case: Consolidated Edison Company of New York, and Sierra Pacific Resources whose stock dropped by 23% and its shareholders sued. Signaling Hypothesis: managers have better information about a firm's future prospects than public stockholders do. Since future dividends are paid out of future profits, and given that managers are reluctant to cut dividends, any change in dividends to be paid is often viewed as a signal of future profits. Thus, increases in dividends generally result in stock price increases and cuts in dividends generally result in stock price declines. The clientele effect: different clienteles of stockholders prefer different dividend payout ratios. Firms have different payouts based on their own internal business needs. Thus, when a firm switches its payout ratio, perhaps due to business imperatives, the current clientele leaves and another clientele must come in to take its place. If more investors leave or if they leave quicker than the new clientele enters, this could lead to a temporarily depressed share price.3. Evaluation We have looked at both positive and negative factors that could influence the share price and market value of FPL Group. On May the 5th the price had already fallen by 6%, apparently because of the Merrill Lynch report. If other analysts decided to downgrade FPL Group, this could have a dramatic effect on the share price. If the dividend cut is really on prospect, than the share price would fall regardless of the reasons behind this cut, whether they are really for strategic growth or financial trouble. What is harder to predict is by how much the share price would fall, and for how long it would fall. From a financia...
