The market places a value on the stock of a corporation on the basis both of the dividend payments and of the earnings available for dividends. Since a present income which may be immediately enjoyed is more valuable than a future income, the earnings not declared as dividends will not enhance the price of the stock nearly so much as those earnings which are immediately distributed to the stock holders. But the purchaser will estimate the value to him of the surplus earnings in so far as, in the first place, they give an assurance of the present rate of dividend disbursements continuing, and in the second place, in so far as they hold out a prospect of an increase in the dividend rate at some time in the future. The capitalist contemplating a purchase of the bonds of the corporation is interested in the amount of earnings left after operating and taxes, and, therefore, available for the payment of interest. From his viewpoint the less of this paid out in dividends the better.
Directors are generally under no obligation to declare any dividends, no matter what the earnings are, and cannot be compelled to de clare them unless the circumstances of their refusal have an element that is essentially fraudulent. If the stockholders differ from the directors on this matter of dividend policy, their remedy is to elect other directors as the terms of the present directors expire. A board of directors may declare a dividend whenever the affairs of the corporation show that it has a surplus, and up to the amount of the surplus. If the surplus has all been invested back in the plant, and the corporation has no cash to pay out in dividends, it may, unless there is a statute to the contrary, borrow money to procure the funds for the disbursement; or it may declare a stock dividend. As already described in the chapter on financing by an appeal to the stockholder, the sale of stock, with a market value at a premium, to stock holders at par, amounts essentially to the declaration of a special dividend. The decla ration of a stock dividend comes to the same thing, except that the stockholders are not called upon to pay anything for the stock instead of making a payment less than the market value. A stock dividend regularly has the nature of a special distribution rather than of the ordinary dividend payment.
Though directors who have consistently turned earnings back into the property may sometimes declare a stock dividend just to give the stockholders something in the way of a dividend distribution and keep them satis fied with the management, usually a board of directors resorts to it for special purposes. It may be desirable to increase the number of shares so as to reduce the market price of the stock. Stock that sells close to par sells at an advantage over stock that sells at a high premium. Again, it may be that a close cor poration has conducted the enterprise. The few stockholders have held the stock repre senting their interest in the business. No oc casion has arisen for any trading in the stock, and the number of shares in relation to the value of the assets has not been material. But the owners of the business now wish to liquidate all or part of their interest by selling it to the general capitalist public. To do this successfully they need to have their stock have a market value at the maximum not greatly in excess of par. They may effect the result by declaring a stock dividend large enough to amount to a distribution of the surplus in that way. Such a procedure, how ever, is rather in the nature of a recapitaliza tion than of a dividend.
Sometimes, instead of borrowing money to pay a dividend when the corporation has a surplus, which is entirely invested in the plant, the directors, wishing to maintain the appearance of regularity in dividend payment and anticipating a date when the corporate income will produce a cash surplus, may declare a dividend to be paid by the issuance of dividend warrants. These are simply in the general nature of notes of the corporation payable at a time when the directors antici pate that the corporation will be in funds. Such payments maintain the semblance of regularity of dividends and give the stock holder something on which he can actu ally raise cash and so really do give him the benefit of a continuity of income. The term "dividend warrant" used in the explanation of this transaction is sometimes used in another sense as simply indicating the checks (or it may be drafts) by which a corporation disburses a regular cash dividend.