LETTER OF SUBMITTAL VII 
From 1920 to 1926, inclusive, the large dividend distributions in 
stock and cash, more particularly the former, reduced the average 
surplus per dollar of capitalization for these 2,971 companies from 
$1.07 to $0.53. Surplus per dollar of capitalization at the close of 
1926, therefore, was below that at the beginning of 1913, when it 
amounted to $0.60. 
The declaration of stock dividends at the rate prevailing in the 
last few years does not appear to be the result of any controlling 
necessity and seems to be of questionable advantage as a business 
policy. In the first place, the reduction of surplus through a stock 
dividend leaves the stockholder’s equity in a corporation precisely 
the same as it was, as measured by its book value. The result in 
this respect is the same as if the corporation increased the number 
of shares of its capital stock by splitting the original quantity into 
the same number as is outstanding as a result of the stock dividend. 
Second, the stock-dividend policy places permanently beyond the 
reach of shareholders for purposes of any subsequent’ distribution in 
cash or other assets whatever part of the surplus is capitalized. 
From the standpoint of the corporation it has been argued that this 
is an advantage because new capital has in effect been thus per- 
manently obtained without the necessity of selling new securities. 
But, essentially, this is only an argument for financing capital 
requirements from earnings and hence 1s not inseparably or peculiarly 
related to stock dividends. 
Third, the capitalization of surplus automatically reduces the total 
surplus, surplus per dollar of stock capitalization, and surplus per 
share below that which would be available if the capital stock is 
split into the same total number of shares. The corporation surplus 
serves as a reserve fund out of which dividends may be paid when 
not earned during the current year and against which losses and 
adjustments (if not too large) may be charged, thus avoiding possible 
impairment of the capital investment and mability to pay dividends 
without a readjustment of capital structure, even though such 
dividends are earned. On the other hand, where no stock dividends 
are declared shareholders may get a wrong impression of the nature 
of their property if the surplus has in major part been already em- 
bodied in fixed assets. The capitalization of that part of accumu- 
lated surplus thereby rendered unavailable for dividends or for 
reserve funds that may be needed later might be defended, under 
such circumstances, as a desirable correction of capital accounts. 
Had capital stock “split ups’ been substituted even to a com- 
paratively limited extent for stock dividends from 1920 to 1926 
each shareholder might have possessed as many shares as he held 
at the end of that period, but each share would have been somewhat 
better protected, mn so far as surplus serves as a protection to 
shareholders. 
The foregoing statements should not be taken as favoring the 
creation of an excessive surplus, or its indiscriminate investment. 
Even though it is necessary or desirable for one reason or another 
to pursue a policy of building up a large surplus from earnings and 
reinvesting it in the business, it does not follow that it is either 
necessary or desirable to capitalize that surplus to the extent pre- 
vailing in the last few years. 
By the commission. 
W. E. Humparey, Chairman.