A form of dividend payment which appears to be growing in popularity is the issuance of stock representing profits not otherwise distributed. Stock dividends are issued for any of three reasons:

1. In order to give to stockholders tangible evidence of the increasing value of their property.

2. In order to maintain the market value of the stock at a price which will make it more readily marketable.

3. In order to veil huge profits in prospect by making it possible to declare a small or moderate dividend on a large amount of stock instead of a very high dividend on a small amount of stock.

* Daggett's "Railroad Reorganizations," pp. 274-276.

These three motives are not always clearly distinguished; one of the three is usually predominant. It will be agreed by everyone that the payment of a stock dividend does not in itself add anything to the assets of the stockholders who receive the dividend. If the owner of one share of stock in a corporation with $100,000 stock outstanding, is given, we will say, a 900% stock dividend, so that he becomes the owner of 10 shares in a $1,000,000 corporation, his real standing has not been changed in the slightest. He remains, just as he was at the beginning, the owner of 1/1,000 interest in the enterprise. His only real gain comes in the mental satisfaction that he receives if he continues to hold his stock indefinitely (and this is by no means a negligible factor), or in the easier marketability of his holdings if he wishes to sell them. Even the third motive does not affect the shareholder's income but merely the nominal rate of dividend on his holdings.

A clear illustration of the predominance of the first motive is to be found in the recent announcement of a 10% stock dividend on the part of the Corporation of Riker and Hege-man, a company which owns a chain of drug stores which is controlled by interests associated with the United Cigar Stores Company. During the process of building up this last-named company, no cash dividends were declared but the increasing surplus was represented by frequent declarations of stock dividends. A number of other companies have adopted the practice of paying regular stock dividends in addition to cash bonuses. The annual 4% stock dividends of the Proctor and Gamble Company have been referred to. The American Light and Traction Company has for several years declared regular quarterly dividends of 2 1/2 % in cash and 2 1/2 % in stock. The United Light and Railways Company is paying quarterly dividends of 1% in common stock. The American Gas and Electric Company and the City Service Company have also paid small stock dividends. It may be assumed that the practice in the case of public utility companies has in view the desirability of keeping- down the rate of cash dividends to a moderate amount. Much the same plan has been followed by some of the English public utility companies.

Stock dividends which are intended to represent large accumulations of surplus that could not be disbursed in cash have been especially frequent of late years among automobile companies. The Packard Motor Company is said to have paid no cash dividends on its common stock, which is closely held, but did pay in 1913 a 40% stock dividend on its $5,000,-000 common previously outstanding, bringing that issue up to $7,000,000. The General Motors Company not long ago declared 150% stock dividend. The record among motor companies up to the present time is held by the Chalmers Company, which in 1910 paid a stock dividend of 900%. Even this record, however, is likely to be overshadowed by the action on the part of the Ford Motor Company, which has been announced but not yet put into effect, providing for a stock dividend of 2,400% with a view to raising its outstanding capital stock from $2,000,000 to $50,000,000.

The record of the Singer Sewing Machine Company, with its various stock dividends of 100 and 200%, has been previously mentioned. Other instances are those of the Pabst Brewing Company, which paid out an issue of $2,000,000 7% cumulative preferred in the form of a 20% stock dividend to its common stockholders; the Pacific Mills, which increased its capital stock from $3,000,000 to $12,000,000 by the declaration of a 300% stock dividend, at the same time reducing the par value of its shares from $1,000 to $100; the American Rolling Mills Company, which paid a stock dividend of 33 1/3 % in 1907 and another stock dividend of 100% in 1909; the Adams Express Company which in 1907 paid a special dividend in the form of 4% collateral trust bonds; the George E. Keith Company, which in 1913 issued $4,000,000 7% cumulative preferred as a 200% stock dividend; and the Midvale Steel Company which in 1910 declared a 1,200% stock dividend increasing the outstanding issue from $750,000 to $9,750,000.

It should be remarked at this point that the issuance of preferred stock or of bonds in payment of dividends is a device that may be regarded as in one sense actually increasing the property interests of each stockholder. Yet, after all, each shareholder is lifting himself by his own boot-straps; whatever he gains in the form of a prior claim for interest or preferred dividends, he has gained at the expense of his common shareholdings which are thereby reduced to a correspondingly lower level. Even in these instances, therefore, the statement that a stock dividend does not in itself change the real value of a stock owner's holdings is substantially correct. The effect of an increase in stock which tends to reduce the market value of each share and thereby to make it more readily marketable, has been discussed in earlier chapters. It is sufficient here to give one illustration.

In 1892 the National Cordage Company, which had been organized in 1887, was at the height of its prosperity and its stock was one of the leading securities on the New York Stock Exchange. In the autumn of that year, a member of the Exchange remarked to President Waterbury, "Your stock is selling too high," meaning that for speculative purposes it would be better to have the stock selling at $70 a share rather than at $140. President Waterbury presented the idea to the board of directors who decided to issue in January, 1893, a 100% stock dividend. The book value of the subsidiary plants was marked up to correspond with the inflation of the capital stock. Through the payment of the dividend the outstanding stock was increased from $10,000,000 to $20,000,000. The directors explained that the new issue was "to represent about $10,000,000 of assets acquired by the company since its formation, and which it is the policy of the company to hold intact." The directors also stated that it would be the company's policy to pay dividends of 7% on the new common stock. A little over a year later the company was in the hands of receivers.*