18 
STOCK DIVIDENDS 
aggregated $2,692,230,607 while the surplus amounted to $2,875,- 
724,634. In other words, the surplus was equal to approximately 
$1.07 per dollar of capitalization. Seven years later surplus had 
increased to only $3,193,568,741 but the capital stock had more than 
doubled ($6,008,069,290) and the surplus per dollar of capitalization 
had fallen to 53 cents. As the amount of surplus per dollar of 
capitalization was 60 cents for these same corporations in 1913, it is 
apparent that the interests of the shareholders were relatively less well 
protected by the undistributed surplus at the close of 1926 than they 
were at the beginning of 1913 despite the enormous profits during 
these 14 years. For this the enormous stock distribution of the second 
period must be blamed primarily, since such an extensive decline 
could not have occurred otherwise. It is obvious that a continuation 
of surplus distribution at a rate corresponding to that of the last 
seven years will carry the surplus per dollar of capitalization to a 
point appreciably below that of 1926 as well as 1913. 
The declaration of stock dividends on the scale of 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 the surplus through stock dis- 
tribution leaves the shareholder’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 dividends. 
The important development in either case is that the total cash divi- 
dends paid after either a split up or a stock dividend are frequently, 
if not generally, greater than before, and the stock itself may be of a 
greater aggregate market value. 
Second, the stock dividend is not altogether advantageous to the 
shareholders of the corporation because this policy places permanently 
beyond their reach 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, since new capital has in effect been thus obtained 
without the necessity of selling new securities. But essentially this 
is only an argument for financing capital requirements from earnings 
and hence is not inseparably or peculiarly related to stock dividends. 
Third, such capitalization of surplus automatically reduces the 
total surplus and surplus per dollar of stock capitalization and per 
share below that which would be available if the capital stock is 
split up 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 inability to pay 
dividends without a readjustment of capital structure, even though 
such dividends are earned. On the other hand, where no stock divi- 
dends are declared, stockholders may get a wrong impression of the 
nature of their property if the surplus has in major part been already 
embodied 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.