Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-12-31
INVESTMENT TRUST
MERGERS LIKELY
Combinations of Trading
Companies Are Forecast
in Near Future.
BY CHARLES F. SPEARE.
Iai Disnatch To The Star

opeCih OlSpatcn 10 Inc star.
NEW YORK, December 31.-The re-
cent discOntinuance of dividends on the
common stocks and capital stocks of
several important American and Cana
dian investment trusts and trading cor
porationS emphasizes the reliance which
this type of finance concern has been
placing on profits taken from sales of
securities to meet its disbursements to
junior shareholders.
When the stock market was rising
ana the finance companies were realiz-
Ing substantial income on the shares
OF companies held in their portfolios,
they were able to be extremely generous
to their stockholders. A study of their
income accounts at that time indicated
that there was a higher percentage of
return on profits on securities than
from dividends or interest on stocks and
bonds owned. Frequently the one item
was several times greater than the other
In some cases direct income, or that
from dividends and interest received,
was sufficient to cover, with a SubStan-
tial margin, the interest on its own
borrowings, In the form of debenture
bonds or bank loans and to meet the
dividends on preferred stocks.
Margin for Dividends.
deal of margin for dividends on junior
securities which bulked high in the
total capitalization Of the companies.
It has always been considered a weak
feature in the stock situation of the
trading corporations that they were so
dependent on profits taken in securities
in order to maintain the prices Of their
shares and to pay dividends on them.
Now that they have encountered an era
of liquidation and deflation of stocks,
numbers of them are faced not only
with lack of opportunity to realize
profits from which dividends may be
paid on junior shares, but their port
folios frequently show value below
cost. This has been q factor in revers-
ing their dividend policy and forcing
them to build up their cash reserves at
the expense of their common stock
holders.
Relatively few of the finance COM
panieS accepted the theory of a widely
diversified investment list. A majority
bought exclusively of American COM
mon stocks. Some specialized in the
stocks Of one industry, as public utili-
and trust company stocks or manufac-
turing company issues. Their manage
mentS were not familiar with foreign
conditions, so they did not invest either
in foreign bonds or In foreign stocks.
They did not believe in bonds, either
American or foreign. Localizing their
therefore, they are in an
unfavorable position now with port
folioS filled with American common
stocks on which the average rate of
return at the cost price is low.
Mergers Expected.
On the other hand, the older and
more shrewdly managed trusts spread
their capital over a wide investment
area, which now gives them a steady
income, an income that Is high in re-
Of debenture bonds or preferred stocks.
They, too, have a large amount of high
cost and low return common stock
among their investments. Against this
is liberal percentage Of income-yield-
ing securities available to pay all of
their fixed charges and contingent liza
bilities and allow a little margin for
their junior shares in case they feel
disposed to continue dividend payments
on them.
Out of the situation which faces the
strictly trading or finance company in
volved exclusively in common stocks
that either show a depreciation in the
cost price or yield too little on the aver
age to insure payments on common or
capital stocks q series of consultations
with stronger companies with q DIVERSE
fed investment list will probably de-
velop. This Is one of the situations that
are expected to become active early in
1890.