This right, or privilege as it is called, is evidenced by a letter or certificate which may be sold and as signed, and listed upon the stock exchange in the same manner as capital stock. It merely gives to the holder the right to subscribe to a certain number of shares of stock at a stipulated price. The right is worth the difference between the value of the stock and the subscription price. The only consistent rea son for issuing rights instead of declaring a stock dividend directly is to open up a little speculation in the shares of the company, usually to the advantage of inside interests, who understand better than the average stockholder the value of these rights.
9. An illustration from Canada.—A typical illus tration of how rights have figured in the financing of a well-known international corporation, is found in the history of Canadian Pacific Railway stock issues. In October, 1912, authority was obtained to increase the company's ordinary capital stock of from $200, 000,000 to $260,000,000. The $60,000,000 of stock was issued to shareholders at 175 in January, 1913, in which month the stock was selling on the Toronto Stock Exchange from 240% to 271%, ex rights.
While it is impossible to estimate accurately the value of prospective new rights, and while there is no basis afforded in the record of rights offered by the Canadian Pacific Railway during the past ten years, the Wall Street Journal prepared the following in teresting table in that connection: On the basis of the average prices of these rights and the dividends paid over the indicated period, Canadian Pacific was an 11.66 per cent stock. In cash dividends above, the stock showed an average yield of 4.31 per cent on an average price of 160; a figure which compares with the yield on average price, over the same period, of two other stocks, then on a 10 per cent dividend basis, namely Union Pacific, 5.44 per cent, and Lehigh Valley, 6.50 per cent.
As indicated in this comparison, rights have played a much more important part in determining the market valuation of Canadian Pacific than of the other two. On the average price of 160, cash divi dends and rights together yielded approximately 6.96 per cent.
The issue of rights by the Canadian Pacific Rail way has invariably been the subject of criticism in Canada. In regard to the criticisms advanced re specting the issue in January, 1913, the Monetary Times, of Toronto, said: The general argument is against selling the stock at less than the prevailing market price, it being contended that many millions of dollars are sacrificed, and that these should properly go into the company's treasury. In other words,
the directors are said to issue considerably more capital than would be necessary were they to sell it at the market price. The directors of the Canadian Pacific know better than any what they can and what they cannot do in the financial market. They recognize, too, than when one or more of the highest standing United States railroads tried to finance a new issue of stock on the market-price plan, bearing the hall-mark of "soundness," they failed. This being so, it is scarcely likely that they themselves will succeed.
Regarding the sacrifice of the high market quotations reached by the Canadian Pacific Railway stock today, it is a moot question how much this enhanced valuation has been due to the recognition in the investor's mind of the very policy on the part of the management which in some quarters is deplored. It is a question also how that same valuation would stand the shock of any radical departure from that policy. To put it in other words, much of this high valu ation which the Canadian Pacific Railway is advised to pre serve intact, and to reap the benefit, owes its existence to the knowledge by the public that the possession of shares entails certain rights— to obtain further shares at a price less than market. To this also attaches another consid eration, namely, that original shareholders in the great Canadian transcontinental for years held on to a very dubious path, and that it is only fair, therefore, that they should receive some extra reward for their faith amid trying times.
10. Regularity of dividends.—If a corporation, in successive years, earns ten per cent, two per cent, six per cent and eighteen per cent, why should it not pay out in dividends the full amount earned each year? Why should the attempt be made to build up a surplus and to maintain a regular rate of dividends? Great confusion of thought has been manifested upon this subject.
Surplus consists of the excess of net assets over the par value of capital stock. No company has an ac tual surplus if its net assets are not worth more than the par value of its stock, unless the stock was issued for less than par in the first place. Altho market quotations may not accurately reflect values, it is in teresting to note that a majority of the companies whose shares are continuously sold at less than par upon the New York Stock Exchange nevertheless show a surplus upon their books.