This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
In sharp contrast to the desired regularity of dividend payments is the wide fluctuation in profits that is characteristic of the majority of corporations. Business does not move on a regular and even keel. Economic and financial conditions vary; changes in management occur; difficulties with employees arise; changes in taste may suddenly create new markets or wipe out markets - all these and many other factors which are constantly at work bring about kaleidoscopic changes which often come as great surprises even to people who are intimately acquainted with the business. The sudden outbreak of the European War in 1914, followed by an intense depreciation in iron and steel and machinery industries, was an unexpected variation of this kind. Within a few months it was followed by an unprecedented demand from the European nations at war for the products of American farms and factories, stimulating production and prices to an unheard-of extent; this was a variation no less surprising. It is not necessary, however, to cite the extraordinary conditions produced by the European War.
Rapid fluctuations are constantly. taking place even under normal conditions. During the fiscal year 1913, the Lackawanna Steel Company earned over $3,000,000 available for dividends on its common stock, equal to 8.3; in the fiscal year 1914, prior to the outbreak of the European War, the same company showed a deficit, after payment of fixed charges, amounting to $1,500,000. The experience of the Mount Vernon-Woodberry Cotton Duck Company after its formation is typical of sudden fluctuations that are apt to occur in any industry. At the time the combination was formed in 1899 there was a large demand for its product. In the first six months of 1900 net manufacturing profits were more than $750,000; in the second six months of the same year, the profits sank to $350,000; in the first six months of 1901 there was a manufacturing deficit of $200,000, to which should be added fixed charges of $175,000. Certain lines of business, such as building construction, ship construction, iron and steel manufacturing, and manufacturing of novelties and articles of fashion or luxury, are peculiarly subject to great fluctuations. In Andrew Carnegie's famous phrase these industries are either "prince or pauper".
On the other hand, industries which sell small articles for personal use, such as cigars or household sundries, are likely to avoid fluctuation. The business of the large five-and-ten-cent stores is especially stable; owing to the fact that they are operated on a strictly cash basis, there is usually little difficulty in adjusting expenditures to sales. During August and September of 1914, when almost all other lines of business were suffering, the business of F. W. Woolworth Company and S. S. Kresge Company both showed very satisfactory increases over the business of preceding years.
Companies which follow the policy of protecting their customers and of charging prices that yield them only a moderate rate of profit are likely to be rewarded by being able to maintain a fairly steady volume of sales and of profits. If this policy results in stabilizing dividends, the credit of the company may be so much enhanced as to be of much greater value than any excessive profits it might have extracted from its customers.
Although companies differ widely among themselves, they are all subject to a greater or less degree of fluctuation in their profits and at the same time (with the exception of the closely held corporations) they are all under pressure to maintain regular rates of dividends. How are these two conditions to be reconciled?