Summary:
The traditional view of valuing common stock through the dividend rate clashes with corporate management principles, as companies prioritize reinvesting their earnings over paying dividends. While this policy aims to strengthen the company's financial position and increase productive capacity, it may not benefit stockholders who receive a small return on their investment compared to the company's earnings. Additionally, relying on accumulated surplus may not protect a moderate dividend rate during tough times. Plowing back earnings into the business may not necessarily benefit stockholders either, as it may not proportionately increase a corporation's earning power. Determining dividend policies is entirely a managerial function, and the courts only interfere if they see unfairness. Dividend policies may be determined based on the taxable status of major stockholders who control the directorate, especially when they receive substantial salaries as executives. Intangible assets or stock-watering practices in pre-war days have led to plowing back earnings. Investors tend to prefer stocks that pay high dividends compared to those that pay only a small portion of earnings. However, an investment purchase is justified even with a small dividend ratio if the earnings are incredibly impressive. Shareholders should decide a company's reinvestment of earnings to justify its retention. The idea of distributing the majority of earnings to shareholders would lead to a variable dividend rate, worsening instability in stock values. A liberal dividend policy tends to increase stock prices, while an arbitrary policy aggravates earning uncertainty. Several companies have recently adopted a freer dividend payment policy since they have not been unduly influenced by arbitrary dividend policies, as seen from the highly controversial tax on undistributed profits. Dividend and reinvestment policies should be controlled by shareholder decisions. Companies should ensure that their proposed policies are subject to independent consideration and appraisal by stockholders to align with their interests.