The sun. [volume] (New York [N.Y.]) 1833-1916, 1903-05-24

OF the underwriters' intention, however,
to make their holdings in such stocks per-
msnent and. thus to identify themselves
with every corporation with which they
may be temporarily associated. Tho
profits OF underwriters and promoters
come from the sale Of securities. not from
dividends and interest Their resources
are. 40 far az possible. held In such form
as to be instantly available. To this end
they must sell the securities which they
have underwritten at tho earliest possible
moment.
Returning to his exposition Of the reasons
for the failure OF trusts to accumulate
adequate reserves, Mr.. Meade reminds us
Of the fact, previously mentioned, that the
sale Of trust stocks In view Of the unwll-
ingness Of the investor to buy them, must
be made to the speculator. In order to
persuade the speculator to buy, however.
he must receive the assurance Of large and
immediate returns on his purchase. II he
buys stock outright, to hold for a consid.
cradle time, he usually looks for not LEES
than 10 per cent on the purchase; and II
he buys on margin to profit by an ad'
vance, he expects an advance in price
which can be brought about only by large
and sustained dividends. 1t will not satisfy
q speculative buyer to tell him that tho
profits Of new company will be invested
in betternents which will at some remote
period inure to his sdvant age. Such an
announcement would probably brighten
him away from the stock Of the company
which made it. and with good reason. for
the prospectus has undoubtedly set forth
that the earning power Of the new COM
pany will be sufficient to pay large divi.
dends on both classes OF stock, preferred
and common. not Ave years hence, but
Immediately. Without such sanguine ex-
ecaations the interest OF the Spectator
could not be aroused. He thinks in terms
OF tho present; what will happen five Year,
hence docs not concern him. An individual
who looks far ahead Is an investor. not
epeculator; and a. an investment the
trust, in the form which 1t has usually taken.
Ia, to say the least, undesirable. 1t follows
that the trust stocks could not have been
sold even to the speoulator, without the
promise Of immediate dividends. and since
a quick sale has to be made. these dividends
have to be paid. Moreover. dividend
payments, once begun. must be continued
Nothing is more damaging to the reputation
OF new. company than reduction or pass
ing OF it's dividend. The value OF specu.
latiye stock IL based on it's present yield.
No matter what the purpose OF passing the
dividend may be, the fact OF it's Interrupt
ton alarms the spec,llat or, and Immediately
depresses the st ook whose stream OF income
has been dried up. 1t may be said that
once the st ock is disposed Of. the directors
can then suspend dividends for the sake
OF the surplus reserve
Ionn TINA Ia 0ADAfallv
required for the disposal OF securities oy
underwriters and all others connected with
a trust who have stocks to sell Any at
tempt to dispose OF large amount OF
stock, without reference to the absorbing
newer OF the market, would break the price
beyond the possibility OF quick recovery.
1t is for this reason that the owners OF the
constituent companies are usually required
by the organizers OF trust, either TO hold
their stock OF the market ntil the UNDER
writer's have disposed Of their holdings
or to place their stock in the hands OF the
syndicate brokers. in order that the amount
and manner of sale may be controlled by
a central authority. The market Tor the
stock must first be made. and then 1t
,,I,st he kent made" by the most careful
manipulation.
MI. Meade shows further that dividends
ar, required by the underwriting interest
for still another purpose. IN oIoer 10 iur-
nish the promoters with the cash necessary
for the contemplated hotaton. large loans
have 70 be made by the syndicate mana
oar and the underwriters. These loans
had to be carried. until redeemed by the
proceeds OF the sale OF the stocks purchased
Nv the underwriters. The interest on thes4
loans would be no small sum. The usuat
rate of interest in such transactions voul'S
he around 4 per cent, which. on SIS 100000
NJ cash. an amount sometimes PROVIDED
~o,,ld he $500 900 per year. This the UNDER
writer's would have to pay while waiting
,or their profits. Thus, from their point OF
Wow the payment Of dividends on stocks
beld NV them as underwriters is entirely
nroper. Not merely In order to make
,narke, for their stocks but also in order
n Offset the interest on the money they
had borrowed and handed over to the pro-
moters. and TO give them. while waiting
for the sale OF their holdings, some cur1ens
profit on their investment
The final reason for the payment OF large
dividends by the trusts at the expense OF
their surplus reserves is found in the nature
Of their securities. In previous chapters
dealing VIII tthb VI AVN W. eAAS
attention was directed to the fact that the
stock capital Of the trusts was divided
into preferred and common stocks, and that
the preferred stocks include cumulative
provision that guarantees to the holder
that all unpaid dividends shall be made good
before anything is paid on the common.
Now this cumulative feature. although
necessary In order to tempt the owners
Of constituent companies to sell, offers .
serious obstacle to the accumulation OF
surplus reserve.
It IL difacult for the directors OF trusts to
pass preferred dividends and invest tho
money In increasing the earning power OF
their corporations, because the passed diy1-
dends remain alive - deferred claims TO iu-
ture profits. 1t that the direct ors may.
. Il they choose. allow these preferred oua un.
! TO accumulate to any extent FOR the benent
, Of their surplus reserves. II. however, an
, adequate surplus reserve is to be aoeumu,
! lated out Of the profits towhich the preiefrso
-, stookholder has received q cumulative cnin
the common stockholder must STAND oYe
OF his dividends for perhaps ten years. ~
would be difficult, Il not impossible, TO
sell common 81 ock under these circum.
! stances. This Ia q state OF things wnch
| directors are loath to bring about. they lee'