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By Root 2779 0

to have them paid out within the limits of prudent management; many of the shareholders need their dividend income to live on; the earnings they receive in dividends are “real money,” while those retained in the company may or may not show up later as tangible values for the shareholders. These counter-arguments were so compelling, in fact, that the stock market showed a persistent bias in favor of the liberal dividend payers as against the companies that paid no dividends or relatively small ones.1

In the last 20 years the “profitable reinvestment” theory has been gaining ground. The better the past record of growth, the readier investors and speculators have become to accept a lowpay-out policy. So much is this true that in many cases of growth favorites the dividend rate—or even the absence of any dividend—has seemed to have virtually no effect on the market price.*

A striking example of this development is found in the history of Texas Instruments, Incorporated. The price of its common stock rose from 5 in 1953 to 256 in 1960, while earnings were advancing from 43 cents to $3.91 per share and while no dividend of any kind was paid. (In 1962 cash dividends were initiated, but by that year the earnings had fallen to $2.14 and the price had shown a spectacular drop to a low of 49.)

Another extreme illustration is provided by Superior Oil. In 1948 the company reported earnings of $35.26 per share, paid $3 in dividends, and sold as high as 235. In 1953 the dividend was reduced to $1, but the high price was 660. In 1957 it paid no dividend at all, and sold at 2,000! This unusual issue later declined to 795 in 1962, when it earned $49.50 and paid $7.50.*

Investment sentiment is far from crystallized in this matter of dividend policy of growth companies. The conflicting views are well illustrated by the cases of two of our very largest corporations—American Telephone & Telegraph and International Business Machines. American Tel. & Tel. came to be regarded as an issue with good growth possibilities, as shown by the fact that in 1961 it sold at 25 times that year’s earnings. Nevertheless, the company’s cash dividend policy has remained an investment and speculative consideration of first importance, its quotation making an active response to even rumors of an impending increase in the dividend rate. On the other hand, comparatively little attention appears to have been paid to the cash dividend on IBM, which in 1960 yielded only 0.5% at the high price of the year and 1.5% at the close of 1970. (But in both cases stock splits have operated as a potent stock-market influence.)

The market’s appraisal of cash-dividend policy appears to be developing in the following direction: Where prime emphasis is not placed on growth the stock is rated as an “income issue,” and the dividend rate retains its long-held importance as the prime determinant of market price. At the other extreme, stocks clearly recognized to be in the rapid-growth category are valued primarily in terms of the expected growth rate over, say, the next decade, and the cash-dividend rate is more or less left out of the reckoning.

While the above statement may properly describe present tendencies, it is by no means a clear-cut guide to the situation in all common stocks, and perhaps not in the majority of them. For one thing, many companies occupy an intermediate position between growth and nongrowth enterprises. It is hard to say how much importance should be ascribed to the growth factor in such cases, and the market’s view thereof may change radically from year to year. Secondly, there seems to be something paradoxical about requiring the companies showing slower growth to be more liberal with their cash dividends. For these are generally the less prosperous concerns, and in the past the more prosperous the company the greater was the expectation of both liberal and increasing payments.

It is our belief that shareholders should demand of their managements either a normal payout of earnings—on the order, say, of two-thirds—or else a clear-cut demonstration that