The Washington times., 1901-07-30
The Watering of stocks.

| Inc Oh STOCKS.
1t is sometimes argued that the
watering of stocks in corporations does
no harm. and is n matter of no concern
to the public. Secretary Gage has been
quoted as expressing that opinion, his
statement being that the corporation
can only realize just SO much profit
anyway, and hence it makes no differ
ence how much the stock is diluted.
That sounds plausible, and as a mere
abstraction it may be true. But the
business of corporations is not done
upon abstract principles, and when we
observe them constantly pouring more
water into their stock it is but reason
able to assume that they have a mo-
tive in doing so. AS their motives are
wholly commercial. we must conclude
that they water the stocks for The pur-
I profits. Nor is il difficult to see how
the expedient may have that effect.
Granting that as a rule corporations
| will make all the money they can, it
undoubtedly is equally a fact that in
many cases the watering of the stock
! is a means to the end in view In every
| business enterprise there is always a
| continuous effort to secure fair profit
! upon the invested capital If, therefore.
/ a corporation increases its stock from
/ one million dollars to two millions. it
| stands 10 reason that more profits are
expected. If the increase is made by
the actual addition of a million dollars
capital it is just and proper that there
should be a corresponding increase Of
profits. That would not be case of
wdtered stock. Eus If the stock is sim
ply doubled without any addition of
capital, or when the new capital is less
than the nominal value of the new
stock. to whatever extent such stock is
in excess of the added capital, it con-
stitutes a case of watering" Not in
frequently the stock is increased and
the new stock is simply divided among
the holders of the original stock, being
nominally paid for out of the treasury
But whether the stock is paid for or
not. 1t is very certain that when a cor
poration doubles its stock it is for the
purpose of gain. This may be realized
in two ways: First, by the increased
wher the number of shares is increased,
doubled we viii! say. there is always a
strong effort by the controlling interests
to prevent the shares from falling pro
rata, so that two shares will stand for
more money than one share dill before
the increase Here we have a gain at
the expense of those who purchase the |
stock after the increase has been unsde |
But in order to maintain the price OF
the stock, it is necessary that the best |
possible showing shall be made in the I
way of profits. Hence all of its plans (
and estimates are based upon the nom !
inal value of the stock after watering. /
1T does not follow that the water in /
the stock always represents its full face |
value in the way of additional gains. |
But if the stock can be watered to the /
extent of a million dollars, and profits |
be realized on two hundred thousand !
dollars of the increase. it IS clear that |
the process has resulted in very sub
stantial advantage to the corporation
When the stock has been doubled the
directors at once begin TO figure how to
make fair returns upon the total
amount of nominal capital. They pay
no attention tc the price at which the
stock was sold tut consider its par
value only Thy can claim very plaus-
IDLY that the r.oIts should equal six per
cent upon the capital. On its face IL is
a reasonable proposition. But if they
had contended that the profits should be
twelve per cent upon the old stock, il
would strike the public that the profits
were excessive This fairly illustrates
the principle.
A watering of the stock enables the
to make a larger aggregate
profit. while keeping the nominal per-
rentage down. In any issue that arises,
as TO wages or prices, the di-
rectors of the corporation can always
point to the capital stock and plead the
necessity and justice of fair dividends
On the Investment, assuming always
that the stock represents an actual in
vestment, no matter how much water
It contains. There may be cases In
which IL makes very little difference !
whether the nomina. value of the stock
IS large or small, but as broad gen
eral rule it may safely be assumed that
when corporation waters its stock
[ does so with pecuniary advantages in
view.