The decision begins with the buzz that FPL may decide to freeze its dividend at $2.48 per share or even potentially reduce the dividend at FPL’s annual meeting. Kate had previously valued FPL with a “hold” recommendation three weeks earlier with the belief that FPL will either keep its dividend payout at $2.48 or slightly increase it. However, with the news of this new rumor about FPL dividends, FPL stock price fell by 6% because a freeze of the dividend would mean that FPL would end a 47-year streak of annual dividend increases. Now Kate is reconsidering her “hold” rating and contemplated issuing a new updated report to revise her investment recommendation. It is now to decided how a change, if any, to the current dividend policy would affect shareholders, which option would have the greatest benefit to the shareholders and FPL, and what should be advised to investors with regard to FPL stock.
Two theories of dividends come up with the FPL Group. The first theory is the Signaling Hypothesis and the second theory would be the Clientele Effect. The Signaling Theory is essentially the theory that managers of a certain company have better information and are more informed internally about a firm's future prospects than the public stockholders. Future dividends are paid out of future profits, so any change in dividends …show more content…
There are no notions to believe FPL is in any urgent financial trouble or that there will be a drastic dividend cut. FPL’s stock will fall with the announcement of a dividend freeze or reduction; it is just a matter of how much. There is an upside potential for FPL and there is evidence that they will be prepared for more competition. The FPL stock price again will drop initially with the announcement of a dividend freeze or reduction, but “hold” on to the stock to not take a loss, and continue to “hold” the stock because the FPL group provides sound evidence that the stock price will continue to rise in the near