Every evening, Wilmington daily commercial., 1922-12-11
By GEORGE &. ROBERTS

II a business Is growing Il will
need more capital and the readiest
way of providing it Is BY allow
ing profits to accumulate from
year to year. II the opportunities
for expansion are good, it is often
the case that only a small share
Of the earnings are divided, and
not infrcQuently companies 60 for
years without paying any dividends
in order to apply all the profits
to developing the business or get
ting it into strong financial posi-
ton.
In the long run, however, stock
holders want to participate in the
company's prosperity in q tangible
manner, and where the stock is
widely distributed a proper con-
sideration for the varied circum-
stances of the holders dictates that
regular dividcSds be paid and that
the distribution be increased from
time to time as the company's as
sets and earnings increase. This
is consistent, however. with the
policy of continually retaining a
part OF the earnings.
When the condition Of the COM
pany justifes an increased distri-
button to stockholders, the action
seldom applies to anything but cur
rent earnings. A growing business
docs not distribute surplus which
is part of its working capital. II
may raise the dividend rate on its
outstanding stock. or il may con-.
vert portion of the surplus
fund into permanent capital by
means of what is called stock
dividend" This is done by issuing
TO stockholders a given amount OF
new stock. in proportion 10 their
holdings. and making a bookkeep-
ing entry by which the surplus"
fund is reduced and the capital"
fund is increased to correspond
with the amount of new stock.
Not a Real Dividend
The fact that such an issue of
stock is called dividend" seems
10 have led many persons TO think
IL payment from the treasury of
the company, similar 10 a cash divi-
dend. Ii is nothing OF the kind.
IL is not payment; IL is not a
distribution. IL conveys no title to
anything that the recipient did not
own before. Nothing is changed,
except that the stockholders share
of the surplus has been changed
on the books Of the company into
capital. and he is given a stock GER
tihcatc representing that capital.
| The company's assets are just what
they were before and each stock
holders interest IN them is Just
what il was before. No value has
been created or distributed There
is no morc reason for lcvying a
tax upon the conversion OF sur
plus" into capital" than for levy
ing a tax on the opening OF new
set OF books. In fact surplus" !,
part OF a corporations capital. a
stock dividend dedioates il perma-
nently to the business.
The Supreme Court Of the United
States, in the case of Eisner "
Macomber, 2S2 L. s. lS9. in which
j, held that stock dividends were
not liable for taxation as incom,
under the law, said:
This however declaration Of a stock div'
dond). - merely Bookkeeping that does no
affect the aggregate assets q the oorpor alto,
or It's outstanding liabilities: Il doc
not alter the preeSirirg proportiona'e intel
| arV stakeholder the irtrir
sic value Of his holding or Of the aggrerat
holdings 81 the other stockholders as the
stood before. The new certificates slmp'
increase the number Of the shares, wit
consequent dlu,ion Of the value OF eae
share
The difference 20 the stockholde
is in the fact tina, while surplus
does not receive dividends. "capi
tai" does. and the new stock !
evidence of a claim for dividend
in the future. This. however, is
difference in method rather than j
fact, because just as much coul
be distributed in dividends on tn
old stock as on the new. II
company with $4,000 capital an
$4,000 surplus pays six per Ger
dividends il distributes 5000.
il wants 10 increase the distrib,
ton TO $4,000, il can do so b
either increasing the dividend rat
10 II per cent or by convertin
the 10000 surplus into capital an
continuing 10 pay D per cent o
! the 10000 capital