Nipsco Nipsco Industries Inc. (Northern Indiana Public Service
Company) is a utility-based holding company involved in
providing natural gas and electricity in northern Indiana,
water in central Indiana, and interstate natural gas pipeline
services. In December 1997, Nipsco’s board announced that it
planned to split its stock two-for-one, and also to raise the
quarterly common dividend payment from 45 cents to 48
cents per presplit share. The press release stated that the
dividend increase was in keeping with the firm’s goals of
maintaining a 60 percent payout ratio tied to growing
earnings each year. The firm claimed that the increase reflected
continued improvement in the firm’s operating and
financial performance. Despite having beaten analysts’ earnings forecasts in
three of the four quarters prior to splitting, Nipsco’s stock
had underperformed the S&P 500. At the time, Nipsco’s
ratio of book-to-market equity was 0.33. Nipsco’s chairman
and chief executive officer, Gary L. Neale, stated: “The two-for-one
split is a strong expression that we continue
to believe our stock is undervalued. The split will
make it easier for retail shareholders to more fully participate
in the company’s growth.” During 1997, Nipsco had beaten analysts’ consensus
earnings per share expectations in January (by 2 cents),
April (by 12 cents), and July (by 3 cents). It missed in
October (by a penny). Despite having beaten expectations,
in 1997 Nipsco stock underperformed the S&P 500
through November by 5.6 percent. In fact through July of
1997 Nipsco had underperformed by 19 percent. After
splitting its stock, Nipsco outperformed the S&P 500
by 32 percent for the next nine months. At the end of
December 1998, Nipsco returned 27.5 percent for the
year, while the S&P 500 returned 26.6 percent. At the end
of December 1999, Nipsco’s cumulative return since the
stock split was -22 percent, while the S&P 500’s cumulative
return was 51.4 percent. Case Analysis Questions- Discuss Nipsco’s dividend policy in the context of the
chapter text.
- For those students who have read Chapter 5, discuss
the extent to which Nipsco’s stock split fits the general
pattern of firms who split their stocks.
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