It seems almost superfluous, after what has been said above, to cite examples of financial difficulties which are traceable to the payment of dividends which were not earned or which could not be met without reducing working capital below the limits of safety. The number of examples is practically infinite. Some of the most flagrant are furnished by the records of important industrial combinations. Following is a self-explanatory extract from a review published in the London Statist of October 17, 1914:

The evil result of continually paying out the earnings of a company - and perhaps a little more - may be illustrated from the experience of Dick, Kerr and Co. The annual net trading profits of this company for a series of years has been as follows:

1909

...............................................................

28,168

1910

.................................................................

22,821

1911

...............................................................

37,994

1912

...........................................................

3,275

1913

................................................................

30,092

1914

........................................................................

44,762

On the whole, the net profits show a favorable tendency toward increase, although this is strikingly interrupted by the bad year, 1912. In 1909-10-11, the company paid in addition to its full debenture interest, preference dividends amounting to 18,300 and ordinary dividends amounting to 13,000, leaving annual deficits as follows:

1909...........

18,425

1910...........

20,884

1911.........

5,366

In 1912, the ordinary dividends were cut off" and have not since been resumed, but the preference dividends were continued with the result that in that year a deficit was still shown of 26876. In the following year there was a surplus of 309, and in 1914, a surplus of 15,201. On October 15, 1914, the preference shareholders gave their consent to the issue of additional debenture stock. It was stated that the company's cash resources have been greatly depleted by the redemption of existing debentures and at the same time the need for working capital has increased. "For some time past, temporary accommodation has been obtained from the company's bankers or others".

As to the record of American industrial combinations, we cannot do better than present the following abstract from the conclusions ably stated in Dewing's "Corporate Promotions and Reorganizations".

Nearly all the large industrial combinations have been guilty of distributing dividends recklessly. This is due in part to the extravagant promises on the strength of which securities have been sold, in part to the optimism of promoters and directors, in part to a desire to unload on the part of many of the insiders.

The failures of the Corn Products Co., The American Malting Company, the U. S. Realty Co. and the New England Cotton Yarns Co. were the direct results of unwarranted payments of dividends. The U. S. Leather Co., the National Cordage Co., the National Salt Co., the Consolidated Cotton Duck Co., and the International Cotton Mills Corporation, were all seriously weakened by-payment of dividends at the expense of their cash position.

In the case of the American Malting Co., it was proved that the directors must have declared dividends without having before them any statements of earnings. This same thing probably is true also of other corporations.

The great fluctuations in industrial earnings are the chief argument against the use of bonds by industrials and in favor of conservatism in paying dividends. In 1908 the Westinghouse Co. had gross sales of $20,000,000 and a deficit of $1,000,000. In 1909, gross sales of $30,000,000 and net profit of $3,000,000.

These fluctuations involve a strong tendency to borrow on short-term notes or even to use short-term notes as a means of raising money with which to pay dividends.

There is sound reason for borrowing on short time in order to meet fixed charges inasmuch as the insolvency and reorganization of the company, even though it be only temporary, involves a severe blow to its credit and trade. For instance, after the panic of 1907, the General Electric Co. had a loss of 25% in its business and the Westinghouse Co. 37%. The explanation seems to be in the failure of the Westinghouse Co.

The fact that insufficient working capital exists at the time of the insolvency of a company is not proof that this is the actual cause of insolvency. It is very often true that the lack of working capital is itself due to unwise payments on account of fixed charges and on account of dividends.

The only possible reasons which can lead directors to pay out unearned dividends are:

1. Ignorance.

2. A false belief in the immediate return of prosperity.

3. A desire to give the corporation a higher standing in the stock market, or with creditors, than its earnings warrant.