The Logan County banner. [volume] (Logan, W. Va.) 1889-1903, 1892-01-14
WATERING RAILROAD STOCK
How Il II Done and How IL AfKects the In
dividual Stockholders.


WATERING RAILROAD STOCK.
i How IL II Done and How II Affects the In
dividusl Stockholders.
Conceding that In fairness the value
and profits Of railway should be al
lowed to grow with the growth Of the
country served. the question arises how
should that increase be registered
Real estate finds purchasers at prices
WHICH show the successive changes in
values. Railroad property cannot be
SO treated A merchant takes an In
ventory upon . certain day, and so can
close his books for the year with exact
ness Not so railway, whose balance
sheet must continue on the ssmcnomi-
nal basis of value from year to year
in order to preserve the continuity of
the company Corporations can show
the yearly or daily fluctuations in the
value Of their assets, and in the value
OF their stocks and bonds based upon
these assets, only by changes in the
market prices, This occasions no
trouble in the cases of industr trial cor
operations whose stock is iH-few hands;
but in the case of railroad, whose
shares are owned largely by persons
/ exercising no direct control over its
| affairs-by investors, in short-other
| questions arise. When increased profit Is
are to be divided, higher dividends
must be paid or additional stock issued
| Usually the stock is "wateredn to make
the capitalization conform in rough
| way to the value of the property as
| determined by the probable earning
capacity. Stock-watering in this its
innocent form is not an attempt to
cover up extortion, but to solve a com
mercial question; it is not cause Of an
increase in profits but rather an effect
OF such increase. whose fairness (par-
ticuiariy toward travellers and shippers)
should be judged in other ways and by
other means There is in the
public mind a prejudice against
the distributions of dividends by
corporations at percentage
higher than the usual interest
upon loans The comparison between
| the dividend rate and the loan rate is,
however, not fair one; loans upon
mortgage or collateral should rather
be likened to the bonds of a railroad,
both being secured debts. The stock
holders are not creditors of the cor
| poration, but partners in the enter
prise, for whose risks and profits the
| rate of interest on secured loans fur
nishes no true standard of comparison.
| BY this prejudice against high divi-
dends the public is itself mainly re-
sponsible for such issues of unpaid
stock as are made to conceal the fact
| that the earnings are larger than the
| usual rates of interest Thus, also, it
| often comes about that the public de-
prives itself of a certain natural pro-
lection against unfair or inequitably
high earnings, which, if openly paid,
might attract competition through the
openly displayed possibility of large
profits. Railroad tariffs are made with
little or no reference to the capitaliza-
ton. If the possible tolls will yield a
return, well and good; If not, the cap
ltal must be readjusted to the cirsum-
stances Such restrictions upon divi-
dends do sometimes affect the number
of improvements made in property or
in train service by turning to better
ments funds which would otherwise be
distributed to stockholders; but this is
the utmost Since the ownership of
the property of corporation must be
represented by certificates of capital
stock, the most natural condition of
affairs is that where the nominal or
par value of the certificates CORE
spends most closely to the commercial
value of the railway as measured by
its earning, power, it is impossible for
the small fluctuations in value to be
followed by an increase or decrease in
the amount of capital stock. Yet good
financial management requires an APP
Proclamation. This applies particularly
to those corporations whose stock is
bought and sold on the exchanges
large increase in percentage of divi-
dend paid does not increase the value
of the stock proportionally. Assum-
ing.-for illustration, six per cent as the
average of return upon money invest
ed, IT road now paying that percent
age should advance it's dividend to
twelve per Ant, it would not find its
stock doubled in value; or briefly. two
shares of stock receiving six per cent
each woald be worth par each or two
hundred dollars for both, while one
share receiving twelve per cent. would
sell for about one hundred and fifty
dollars Doubling the latter would in
crease the value of each holders por-
ton, but would require no more money
for dividends than before. This law
of finance was strikingly illustrated
last year by the success of the English
so-called conversion companies En-
glish journals have always denounced
American methods of stock watering,
yet the British railways have. been
obliged for their own protection to APP
peal to parliament for permission to
double their ordinary stock This or
binary or common stock receives what
ever percentage of profits is left after
paying fixed amounts upon the prefer
entail stocks In the case of the sue
cessful companies the common shares
are now receiving percentage upon
their par value larger than the ruling
rate OF interest, though their selling
value has not been increased corre-
spondingly. Taking advantage of ~this
state OF things, conversion company
can buy block of common stock re-
ceiving large dividends and issue in
stead its own stock to larger face
value, this being divided into portions
each bearing no more than the prevail
ing rate Of interest on loans. As these
portions sell at above par, there is q
handsome profit on the whole transac-
tion.-Political Science Quarterly.
MIGRATING INSECTS.