It is a certainty that the short seller of dividend-paying stocks
suffers a drawback from dividends, except in the rare cases where
interest is allowed on short stocks. If we sell short a 6% stock at par
and at the end of a year find the stock still selling at par, we have
lost 6% without adverse market action. This onus cannot be escaped by
short-time commitments; it is merely a matter of degree. The chronic
short seller is swimming constantly against the current.
There is one point about dividends which is widely misunderstood
by ordinary traders. It appears impossible to make a great many
individuals understand that short sales may be as intelligently made
the day before a stock sells “ex-dividend” as at any other time. Even
when good reasons for a decline exist, traders fight shy of “swallowing
the dividend,” or retire commitments just before dividend payment for
no other reason than that such distribution is to be made, which is, in
fact, no reason at all.
The disadvantage to the seller of stocks through the earning
capacity or increment is the same on the day or the week preceding
a disbursement as at any other time. The earnings of the company
are a steady day to day affair, and are, as they accrue, constantly
considered in the price of the stock. In other words, the prices of
listed shares are at all times “flat.” At a point midway between two
dividend days, the stock reflects in its current price half the amount
of the undistributed dividend, or other increment. For example, if a
certain stock sells normally at par and pays 6% per annum (3 per cent.
in January and 3 per cent. in July) the price of the stock in March,
eliminating speculative influences, would be 101½ and in July 103.
When on July 1st, the 3 per cent. is distributed, the amount is simply
taken away from the company and from the price of the stock also. It
now returns to its normal price, 100, and whether it will go up or down
from that point is a question for speculation. The factor which made
the price 103 has been eliminated and it remains for the corporation in
question to again earn 3% available for distribution before the next
dividend day.
Perhaps this point may be made clearer by assuming that a certain
stock is not handled on the “flat” basis, but is dealt in “and
interest” after the method sometimes employed in bond transactions. Let
us again eliminate speculation and take for example a stock selling
at 100 and paying 6%. Assuming that a dividend had been paid on this
stock on January 1st, the purchaser of the stock on February 1st
would pay 100 for his shares, and would also pay to the seller the
accrued dividend for one month, or ½ of 1% which is exactly the same
proposition as if the stock had been quoted flat on the Stock Exchange
at 100½. On March 1st, the purchaser would pay 100 for his shares and
1% accrued dividend or 101, etc.
It appears, therefore, that the widespread idea that it is dangerous
to sell a stock just before a dividend day is not sound. In fact, the
whole matter may be dismissed by saying that if there was any good
or logical reason for expecting a premature recovery of the price
of dividend-paying shares, or an advance founded on any reason in
connection with dividends other than the gradual accumulation from one
date of disbursement to the next, the whole problem of making profits
in Wall Street would be solved. The rule must necessarily work both
ways, and if it is dangerous to sell at certain periods, it must be,
in inverse ratio, safe to purchase. All we would need to do therefore,
would be to await the dates on which shares sold “ex-dividend” and make
purchases. Here then, is exploited a patent way of getting the best of
the market without study or effort. In truth, there is nothing whatever
in the theory any more than there would be in buying Government bonds
for a rise just after the interest had been paid on them. If good
reasons exist for sales, they may be made as confidently at one time as
another. The disadvantage of being short of dividend-paying stocks is
always present, and it cannot be escaped, but the operation is a day to
day affair not a matter of certain dates.
_Basing Railroad Values._
“The problem of railway valuation is comparatively
simple, and beyond the reach of but few. A railway is
primarily a carrier, a carter, a drayman. Obviously
then, in considering an investment, we shall ask,
What sort of a road has it? What sort of vans, and
what sort of horses? What sort of trade? A teamster
doing business on a fine level macadamized road, with
big, heavy vans, and heavy draft horse, can work at
a profit and underbid a carrier with old vans and
poor horses, working on roads of heavy grade. So,
for example, a railroad, other things being equal,
with a water grade like the New York Central, has a
tremendous advantage over an up and down grade like
that of the Erie. The Illinois Central can do
business much more cheaply than the Missouri Pacific.
A road with a magnificent equipment like the Lake
Shore can undercut a poorly equipped road like the
Nickel Plate.
“The initial facts that we wish to know of a railway
then are, What sort of a road has it, what is its
traffic, does it get good rates? When we know what
business it does, what its earnings are, then we
shall ask, how is it capitalized, what are the fixed
charges these earnings have to bear, what is there
left, and what is the amount of stock which has to
share the surplus? We shall ask if its earnings are
stable, if the maintenance is adequate, if the policy
of the road is conservative, if its management is
good or bad. When we have done all this, then we
shall go into the market, ask the prevalent rate
of money, and by a simple rule of thumb, we shall
know, in a broad way, whether the stock is cheap or
dear.”--From “American Railways as Investments,” by
Carl Snyder.
_The Effects of Business Depression on Rails and Industrials._
“There is apparently a popular belief that the general market always
moves together in a considerable swing, and that any advance in one set
of stocks would be accompanied by a corresponding advance in others. So
far as the general tone of a day’s market is concerned this is true;
but, nevertheless, individual stocks or groups of stocks can easily
and gradually change their selling basis in a brief period of time. In
1901, for example, the industrial stocks reached their high levels,
and suffered a considerable decline in 1902. Meanwhile the rails were
advancing. To illustrate and confirm this statement the highest prices
of both Rails and Industrials in July, 1901, and July, 1902, are set
forth in the following tables. There can be no unfairness in choosing
this particular period. What is to be demonstrated is that it is
possible for the groups to cross each other in price in a given time.
The ten most active stocks have been chosen in each group as fairly
representative of the entire market: