Reference no: EM13387917

Duke Energy Corporation (DUK) is a utility-based holding company involved in providing natural gas and electricity. The company operates its business through the following segments: U.S. Franchised Electric and Gas, Commercial Power and International Energy. The U.S. Franchised Electric and Gas segment generates, transmits, distributes and sells electricity in central and western North Carolina, western South Carolina, central, north central and southern Indiana, southwestern Ohio and northern Kentucky. It also transports and sells natural gas in southwestern Ohio and northern Kentucky.

In December 2007, DUK’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, DUK’s stock had underperformed the S&P 500. At the time, DUK’s ratio of book-to-market equity was 0.33. DUK’s chairman and chief executive officer 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 2007, DUK 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 2007 DUK’s stock underperformed the S&P 500 through November by 5.6 percent. In fact through July of 2007 DUK had underperformed S&P 500 by 19 percent. After splitting its stock, DUK outperformed the S&P 500 by 32 percent for the next nine months. At the end of December 2008, DUK returned 27.5 percent for the year, while the S&P 500 returned 26.6 percent. At the end of December 2009, DUK’s cumulative return since the stock split was -22 percent, while the S&P 500’s cumulative return was 51.4 percent.
a) Is DUK’s dividend policy different from the norm? Discuss.
b) According to efficient-market view, a firm that splits its stock should not see a change in the market value of equity. Discuss the extent to which DUK’s stock split fits the general pattern of firms who split their stocks.

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