FPL could pay high dividend because it was a monopoly supplier. It didn't need to keep much retained earning for investing in expansion or development to stay in competition. In Broadhead era, FPL needed more fund to invest in order to compete with the others. FPL's management team has recognized that the company's payout ratio is extremely high comparing to the competitors. The company needed to reconsider the dividend policy in order to match with the new circumstances. FPL may need to retain a larger amount of earnings than usual in order to prepare for possible entry of the new competitors.On the day of the announcement the company's stock price fell nearly 14 percent. Analysts concluded that the action was not an indication of financial weakness, moreover during a month after the announcement the stock price had more than recovered its initial loss. Other benefits brought by this action is:- FPL could show strong dividend growth in the coming years.-As long as earnings increased at a faster rate than dividends, the payout ratio would fall. Q.2 Will the company require substantial additional retained capital in the few years following May 1994?It depends mainly on whether the company has any new investment opportunities with positive net present value (NPV) in the coming few years. If yes, then the FPL may have to retain more earnings for future projects.However, with regard to the forecast made by the company (Exhibit 6), the capital expenditure will be decreasing from $1.34Billion in 1993 to $0.62B in 1998, which is more than a half. If it is the case, the company probably does not need a huge sum of additional retained earnings.Moreover, the electric utilities industry is going through a deregulation period. The competition of the industry may be very severe, the room for further development may be limited. It is not uncommon for the company with main business in a saturated industry to have high dividend payout ratio and r...
