New Britain herald. [microfilm reel] (New Britain, Conn.) 1890-1976, 1922-12-14


preparatory step to q hfHW ~
tribution OF earnings in the SstuA
The distribution, however. may MOI
begin at once. Sometimes the rate
OF cash dividends is reduced, SO
that the amount OF money received
by the stockholders Is no greater
than before the new stock was is
sued. Whenever the actual distri-
button Of earnings to stockholders
begins the payments are taxed I'M
der the present law. II looks like
an excess of zeal to insist upon
taxing preliminary arrangement.
Not Stock Watering
The issuance of new stock by the
conversion of surplus is sometimes
called watering" the stock, but
this is not according to the COM
mon and opprobrious meaning of
the term. II is true that the value
Of the outstanding stock is reduced
to correspond with the increased
issue, but il is not true that the
new stock has nothing behind it.
If paid for from accumulated earn
ings which stockholders have abb
stained from withdrawing from the
treasury it is as fully covered as
the stock issued against payments
into the treasury.
The Motive
II the new stock issues transfer
no values, represent no values that
did not exist before, and give no
claims to dividends that might not
be paid upon the old stock, why
are they issued and why do stocks
advance on the market upon ru-
mors that stock dividends will be
declared1
One reason is that an announce
ment of a stock dividend is usually
accepted as signifying that the
company is in position to increase
its regular distribution to stock
holders, and news of that kind is
usually pleasing. The public, as a
rule, does not enjoy waiting for
benefits, and the fact that COM
pany is earning IL per cent divi-
dends, but paying only 6, retaining
6 for charging the business, does
not make as good an impression
as the announcement that hehce-
forth it will pay IL. 1t is the same
which causes some leg
islators to insist upon the payment
of IL instead of 6 under the same
circumstances, in order that the
stockholders may have to pay
higher taxes. The sagacious stock
holder will reflect that the reten-
ton of the 6 per cent for the en-
Of the business means
larger earnings and dividends in
the future, and the sagacious legis-
lator will reflect that by the same
logic it means larger revenues to
the public treasury in the future,
but impatient stockholders and
impatient legislators alike cannot
bear to wait. It Is the same old
impatience that always has inn
PEELED people to eat the seed corn
rather than plant it in the ground
A stock that has high surplus
value but is paying relatively
low dividend will not as rule
have as high a market value as
one that has a low surplus value
but is paying relatively high divi-
dend. In other words, the inclina-
ton of the public to rate immediate
realization relatively higher than
future realization tends to make
stocks rise on the expectation OF
increased distribution.
Moreover, a stock with high
surplus value becomes unattrac-
tive to many possible buyers be-
cause the price looks so high, and
they are able to buy but few
shares. One Of the old banks Of
New York followed for many years
the policy Of allowing earnings to
accumulate until its shares became
worth about $500 each. OF course
such value is not favorable to a
wide distribution Of the stock. The
book value of the capital stock of
the Ford Motor Company, accord
ing to its statement of June 80,
1872, was about $l,780 for each
500 share. If the present owners
should think it desirable to invite
the public to participate, no doubt
that would be best accomplished
by issuing more shares against the
accumulated surplus, thus reduc-
ing the value per share. One of
the reasons given by the Standard