The Washington herald. [volume] (Washington, D.C.) 1906-1939, 1922-01-05
RAILROADS HURT
BY SAVINGS BANK
LAW in new YORK
Pay Dividends From Sur
plus to Maintain
Standing.

NEW YORK. Jan. I'm this pc
riod of meager railroad earnings.
when a few Companies are paying
dividends out of accumulated sur
plus. either their own or with
drawn from subsidiaries. good
deal of quiet criticism is being
heard of that provision of the New
York State savings bank law, which
requires railroads. among other
things, to pay dividends at the rate
of 4 per cent for five years to give
their bonds a legal status for the
investment of such institutions.
The provision is criticized be-
cause 1t tends to encourage the
payment of dividends when, in the
interest of all classes of security
holders. they should be suspended.
OF two 5 per cent bonds with forty
years to run. all other factors be-
ing equal. the legal bond in this
market would be selling around par
and the nOn-leGal bond around 30.
Or. in the case of two 4 per cent
bonds. respectively similar. the le-
gal bond would be selling around
S5 and the non-legal bond around
rs. In other words. when IL comes
to new financing. there is a saving
of about ten points for the COM
pany that can maintain the legal
character of it's bonds. This Is due,
OF course. to the heavy institutional
demand that is created for a bond
available for this sort Of invest
ment
No Benefit to Bond.
Except as a market consideration.
II is pointed out by the critics.
strength is impaired to a bond by
Ia of
ings after interest and not by the
disbursement of surplus in the form
of dividends. Indeed. il these dis
bursements go too far. they may re-
suit in seriously weakening the
bonds. BY far the greater part OF
the railroad reorganiZations in this
country have been due to excessive
liberality with stockholders. Not
all these mishaps. of course. can he
traced to the New York State saw
ings bank law. as many Of them
have resulted from an effort on the
part of owners to distribute their
holdings, but there Is no doubt that
a few companies have strained
themselves to preserve the legal
investment status of their bonds.
The absurdity of the provision
cannot be exemplified better than
by a comparison between Cleveland.
Cincinnati. Chicago and st. Louis
and certain companies whose bonds
are legal. Big Four suspended div
idends on the common stock in
1910: hence. its bonds are not legal
for savings banks in this State.
From the end of that year to the
close of 1920. the company added to
its corporate surplus s14,S20,0O0. or
about S32 a share on the common
stock Considered from another
angle. this sum is equal to an addi-
tiOnal margin of safety of IL per
cent on the funded debt. as the
debt stood at the close of 1920.
Dividends From surplus
\ number Of railroad companies
paid dividends out of accumulated
surplus prior to Federal control.
most Of them for the purpose of
maintaining their bonds 40 legal
for Institutional investment. In
contrast v th Big Four, it is pat
ent in such cases that the bonds
were weakened by this practice
In short. the law does not con-
form to the practice of bond ex-
perts in determining the statistical
position Of a bond in distinction to
its market position. The statistical
factors include the relationship be-
tween funded debt and stock, the
relationship between earnings and
fixed charges. and particularly the
relationship between surplus earn
ings after charges and dividend
disbursements. 1t is particularly
the latter factor that the law ig-
nOres. In recent years, where the
figures were available, another i'm
portant statistical factor has been
the relationship between the funded
debt and the tentative findings or
the Commerce Commission on valu-
alton.
For the mental quietude of de-
positOrs. it may be pointed out that
sa wings bank officers are more con-
sentative than the law. They sell
dom avail themselves Of the provi-
sion when they see that the Stats
teal position of a bond is being
weakened by payment of excessive
dividends. In other words, the
harm done to savings banks is less
than that done to the railroads is
suing the bonds. and the losses US
ually fall on individual investors.