The Roanoke times. [volume] (Roanoke, Va.) 1890-1895, 1892-01-21
WATERING RAlLRoAp STOCK.
How It Is Dono aud How 1t Affects tho IN
,lividuai Stockhoidcrs

Il
divlduai Shareholders.
Conceding that in fairness the value
and profits of n railway should be al
lowed to grow with tho 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 merchant takes an in
vcntory upon certain day, and so can
close his books for the year with exact
ness Not so Il railway, whose balance
sheet must continue on the same nomi-
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 basod upon
these assets only by changes in the
market prices. This occasions no
trouble in the cases of industrial COR
porations whose stock is in few hands;
but in the case of railroad, whose
shares are owned largely by persons
exercising no direct control over it's
affairs-by investors, in short-other
questions arise. When increased profits
must be paid or additional stock issued.
Usually the stock is -'watercd" to make
the captaliz alton conform in n rough
way to the value of the property as
determined by the probable earning
capacity. Stocll-watering in this its
innocent form is not an attempt to
cover up eXtortion, but to solve COM
mercial question; it is not n cause of an
increase in profits, but rather an effect
of such increase, whose fairness (par-
ticularly toward travellers and shippers)
should be judged in other ways and by
other means. There is in the
public mind prejudice against
the distribution 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 lillencd to the bonds of 4 railroad
both being secured debts. The stock
holders are not creditors of the cor
poration, but partners iii 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 certain natural pro-
lection against unfair or ineuuitably
hInh nOrninnc 1vhio1, &c 4
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 n
return, we'll and good; if not, the cap
ltal must be readjusted to the circum-
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 n 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 bv
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
proXimation. This applies particularly
to those corporations whose stock is
bought and sold on the exchanges A
large increase in percentage of divi-
dend paid does not increase the value
OF the stock proportionally. Assurn-
ing, for illustration, six per cent as the
average of return upon money invest
ed, II road now paying that percent
age should advance it's dividend to
twelve per cent, it would not find its
stock doubled in value; or briefly, two
shares of stock receiving six per cent
each would be worth par each or two
hundred dollars for both, while one
share receiving twelve per cent would
sell Tor 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
Tor dividends than before. This law
OF hnance was strilingly illustrated
last year by the success of the English
so.cal.cd conversion companies" En-
gllsh journals have always denounced
American methods Of stock watering
yet the British railways have been
obliged for their own protection to ap
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 liked amounts upon the prefer
entail stocks. In the case of tho ena-