Daily Kennebec journal. [microfilm reel] (Augusta, Me.) 1870-1975, 1922-12-19

Il a business is growing it will
need more capital and the readiest
way of providing it is by allow
ing profits to accumulate from
year to year. If the opportunities
for expansion are good. it is often
these that only a small share
of the earnings are divided, and
not infreauently companies go for
years without paying any dividends
IN order to apply all the profits
to developing the business or get
ting it into a strong financial posi-
ton.
In the long run, however, stock
holders want to participate in the
company's prosperity in tangible
manner, and where the stock is
widely distributed proper con-
sideration for the varied circum-
stances of the holders dictates that
regular dividends 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
part of the earnings.
When the condition of the COM
pany justities an increased distri-
button to stockholders, the action
seldom applies to anything but cur
rent earnings. A growing business
does not distribute surplus which
is part of its working capital. 1t
may raise the dividend rate on its
outstanding stock, or it may con-
vert a 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 to 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 Real Dividend
The fact that such an issue of
stock is called a dividend" seems
to have led many persons to think
it payment from the treasury Of
the company, similar to cash divi-
dend. 1t is nothing of the kind.
It is not a payment; it is not
distribution. 1t 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
tifcate representing that capital.
The company's assets are just what
they were before and each stock
holders interest in them is just
what it was before. No value has
been created or distributed. There
is no more rea.on for levying a
tax upon the conversion of Sur
plus" into capital" than for levy
ing a tax on the opening of a new
set OF books. In fact Surplus" is
part of a corporations capital. A
stock dividend dedicates it perma-
nently to the business.
The Supreme Court Of the United
States, in the case of Eisner V.
Macomber, 252 U. S. 1879, in which
it held that stock dividends were
not liable for taxation as income
under the law, said:
This, however declaration Of stock dvi.
dend), is merely bookkeeping that does not
affect the aggregate assets of the corporation
or its outstanding Liabilities; it does
not alter the preexisting proportiorate inter-
est Of any stakeholder increase the intrin-
sic value of his holding of the aggregate
holdings of the other stockholders as they
stood before. The new certificates simply
increase the number of the shares, with
consequent dilution of the value of each
share.
The difference to the stakeholder
is in the fact that while Surplus"
does not receive dividends, "capi-
tai" does, and the new stock is
evidence of claim for, dividends
in the future. This. however, is a
difference in method rather than in
fact, because just as much could
be distributed in dividends on the
old stock as on the new. If
company with 100000 capital and
100000 surplus pays six per cent
dividends it distributes $1,000. If
it wants to increase the distribu-
ton to $4,000. it can do SO by
either increasing the dividend rate
to IL per cent or by converting
the 100000 surplus into capital and
continuing to pay f per cent on
the 100000 capital.