A8.1 MINICASE: 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, Nipscos 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 firms 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 firms operating and financial performance.

Despite having beaten analysts earnings forecasts in three of the four quarters prior to splitting, Nipscos stock had underperformed the S&P 500. At the time, Nipscos ratio of book-to-market equity was 0.33. Nipscos chairman and chief ex- ecutive 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 companys growth.

During 1997, Nipsco had beaten analysts consensus earnings per share expecta- tions 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, Nipscos cumulative re- turn since the stock split was 22 percent, while the S&P 500s cumulative return was 51.4 percent.

Case Analysis Questions

1.) Discuss Nipscos dividend policy in the context of the chapter text.

2.) In respect to Chapter 5, discuss the extent to which Nipscos stock split fits the general pattern of firms who split their stocks.