CHICAGO -- The board of directors of Piper Jaffray Cos. voted to slash the company's quarterly dividend to 7.5 cents a share from 17.5 cents, citing possible litigation costs stemming from Piper's disastrous experience with derivative-heavy mutual funds.
The board also said yesterday that net income and net income per share for fiscal year 1994 were down almost 40% from last year.
Piper's Institutional Government income Fund, loaded with derivative holdings, dropped in value about 25% earlier this year when interest rates increased sharply. Several related shareholder lawsuits have been filed in the past six months, most charging that Piper did not adequately disclose to investors the risky nature of that and other funds in the Piper Capital Management division.
Company officials in a statement defended the management of the funds and vowed to fight the lawsuits "vigorously," but acknowledged they are preparing for possible losses by reducing the quarterly dividend.
"While the ultimate outcome of the litigation cannot be determined," said Addison Piper, chairman and chief executive officer, in a statement, "we believe it is prudent to reduce the dividend at this time."
Analyst Michael Flanagan of Lipper Analytical agreed. "I think given the circumstances and the uncertain outlook relating to litigation, that dividend cut was a very prudent move," he said. "However, Piper's stock took quite a hit today, which was mostly investor response to the dividend cut."
At least one investor, Martin Whitman, said he's not deterred. Whitman amassed a 6.3% stake in Piper this summer and said he bought more Piper stock yesterday through his Third Avenue Value Fund.
"I think the stock is very undervalued on a fundamental basis. I don't predict the market, I buy what's cheap, and I think it's very cheap," said Whitman, who specializes in unpopular stocks. He declined to say how much Piper stock he purchased yesterday.
Piper officials said in their statement that litigation-related expenses "represent a significant portion of the company's expense increase this year and in the fourth quarter." A company spokeswoman declined to specify how much was being spent on attorney fees and related costs of defending against the suits.
Company officials noted that additional litigation costs -- the price of settlements or verdicts that could be paid to resolve the suits -- are impossible to determine and were not recorded in the 1994 financial statements.
The company also reported sharply reduced revenues and income for the fourth quarter, which ended Sept. 30. Fourth-quarter revenues fell to about $96 million, 15% below the same period last year, and net income for the fourth quarter sunk to $3.5 million, down 69.9% from a year ago.
But Marie Uhrich, vice president for public relations at Piper, said the company's fourth-quarter results are no worse than those of similar publicly traded securities companies. According to a Piper Jaffray study, for instance, Legg Mason experienced steeper drops in quarterly revenues, net income, and earnings per share during the fourth quarter.
Piper officials put the best possible face on year-end figures. "The reduced dividend rate brings the payout ratio to approximately 20%, a yield of 2.8% on the stock price of $10.625 per share at the close of business Nov. 7, which is in line with many other publicly held securities firms," they wrote.
Flanagan agreed that Piper's declining revenues and earnings resulted mostly from "an industrywide decline in underwriting." He said the company's income was also squeezed by a slight increase in operating costs resulting from a $5 million cash infusion to Piper Capital's American Adjustable Team Trust fund, litigation expenses, and the cost of expansion in the past year.
