Although most dividends are paid in cash, companies are free to provide their shareholders with any type of dividend they want, including shares of stock or dividends in kind.  Although the people on Wall Street often behave like they are a bunch of drunks, that doesn’t mean they are drinking, or that the companies they have ownership in are giving away free liquor, but we have found three cases where that did happen.  Two of these, by National Distillers Product Corp. and Park and Tilford, have been covered in other blogs.  

Whiskey Dividends

On October 15, 1933, shareholders of the National Distillers Product Corp. received a warehouse receipt for 24 pints of 16-year-old whiskey for every 5 shares of stock they owned. The whiskey had sat in a warehouse during Prohibition and with the 21st Amendment repealing Prohibition, the company celebrated by distributing their aged whiskey to shareholders. National Distillers stock rocketed up from 19 at the beginning of 1933 to 111.25 in September 1933 and shareholders not only got free whiskey, but benefited from the dramatic increase in the stock price as well. When the United States entered World War II, the government put a prohibition on the production of whiskey and similar liquors so the alcohol could be used for the production of ammunition and synthetic rubber which could no longer be imported from Japanese occupied Asia. In 1943, this prohibition was lifted and two companies rewarded their shareholders with whiskey they had been ageing in their warehouses. In December 1943, Park and Tilford announced that they were providing shareholders with the right to buy six cases of whiskey at a reduced price. Since the country was fighting World War II and all prices were regulated, the government stepped in to spoil the fun. The Office of Price Administration limited the negotiability of the whiskey purchase rights and the maximum profit on the resale of the liquor. Nevertheless, the price of Park and Tilford stock ran up from 57.625 in December 1943 to 98.25 on May 26, 1944. Park and Tilford took advantage of this increase in the price to sell shares to customers of Ira Haupt & Co.  The brokerage unloaded such a large block of shares that the SEC treated the sale as a secondary offering and suspended Ira Haupt & Co.’s membership in the NASD for 20 days for not marketing the shares as such. The third company that distributed whiskey to their shareholders was the Tom Moore Distillery which provided shareholders with 27 original proof gallons of Kentucky bourbon whiskey for each share that they held.  

Whiskey for Tom Moore

Thomas Selvin Moore was born on March 18, 1853.  His family emigrated from Ireland to begin a new life in Kentucky in the 1840s. Tom began working at John D. Willett’s distillery in 1874 and in 1876 Tom Moore and Ben Mattingly began operating Willett’s distillery on their own and changed its name to the Mattingly and Moore Distillery. The distillery was sold to outside investors in 1881, but Moore stayed on to help operate it. In 1899, Moore struck out on his own and purchased 116 acres of land outside of Bardstown at Morton’s Spring in Kentucky to build his own distillery.  Initially, Moore was able to mash 100 bushels of wheat daily generating 10 barrels of whiskey. The distillery produced “Tom Moore” “Dan’l Boone” and “Silas Jones” whiskeys.  By 1905, the distillery was mashing 300 bushels a day and the warehouses had a capacity of 20,000 barrels. A good wheat bourbon needs to age 12 years or more to reach the right flavor. In 1916, Moore repurchased the distillery he had worked at in Morton’s Spring to expand his production to meet the national demand for his whiskey.

Whiskey for the Shareholders

On November 8, 1943, holders of Tom Moore Distillery Co. stock were issued dividend certificates for 27 original proof gallons of Kentucky bourbon whiskey. Originally, the distribution was scheduled for payment on December 1, 1943 to holders of record on November 26, 1943, but an injunction issued in the Detroit Circuit Court restrained the company temporarily from issuing the certificates.  The record date was changed to December 16, and payment was made on December 21, 1943. The company issued dividend certificates which entitled stockholders to obtain barrels of whisky, equal to 53 gallons to the barrel, according to the number of shares they owned. A second certificate was issued for the gallonage not included in the warehouse receipts.  Someone who owned 100 shares of stock received 2700 gallons of whiskey.  This was equivalent about 51 barrels of whiskey. The certificates allowed holders to withdraw from the company’s bonded warehouse in accordance with federal and states laws and regulations. Of course, the government had to intervene, and the Office of Price Administration estimated that the 27 gallons of whiskey were valued at $31.59 or $1.17 per gallon. Those were the days!  Someone who owned 100 shares of stock received whiskey the government valued at $3,159 and shareholders had to pay taxes on that amount. But this gave the shareholders something to complain out when they got drunk. Not only did shareholders receive a whiskey dividend, but the stock price responded as well. In December 1942, the company did a one-for-twenty-five reverse split reducing the number of outstanding shares from 500,000 to 20,000. This means that the company gave away 540,000 gallons, or about 10,000 barrels, of Kentucky bourbon whiskey to its shareholders. The stock price went from $1 to $25 in December 1942 as a result of the reverse split, rose to 50 by September 1943 and peaked at 200 in November 1943 after word of the whiskey dividend was made public. Tom Moore Distillery stock traded only 40 shares on the Baltimore Stock Exchange in September 1943, but the announcement of the whiskey dividend led to a flourish in trading.  19,760 shares, virtually the entire float of the company, changed hands in November 1943 and 10,880 shares exchanged hands in December 1943. In December 31, 1943 after the dividend had been paid, the price of the stock sank to $75. In 1944, Barton Brands bought the Tom Moore Distillery at $75 a share at a total cost of $1,500,000.  I’m sure that many of the shareholders celebrated the sale by drinking some of the Tom Moore bourbon whiskey the company had given them in 1943.

S&P Global and MSCI are making some major changes in the GICS sectors which will be enacted at the end of September.  Under the old GICS, Telecommunications was one of the 11 GICS sectors which included primarily telephone companies.  S&P Global and MSCI are changing the Telecommunications Sector to the Communications sector which includes not only Telecommunication Services, but Media and Entertainment stocks, which includes Advertising, Broadcasting, Cable & Satellite, Publishing, Movies and Entertainment, Interactive Home Entertainment and Interactive Media Services. The most significant impact of these changes is that two companies that formerly were part of the Information Technology sector, Alphabet and Facebook, will be moved over to the Communications sector while Amazon has become part of the Consumer Discretionary sector since it is classified in the Internet & Direct Marketing Retail sub-industry.  Although this leaves Apple and Microsoft in the Information Technology sector, this change has dramatically reduced the size of the Information Technology sector in the GICS.  At the end of August 2018, the Information Technology sector represented 26% of the market cap of the S&P 500 while Telecommunications represented only 2%.  These changes have turned the conservative, high-yielding Telecommunications sector into the high growth, low-yielding Communications sector. This reorganization of the GICS sector will balance out the two sectors by market cap more evenly. This raises the questions, however, as to how the Media & Entertainment market cap of the new Communications sector has grown over time.  Global Financial Data has data on the American stock market going back to 1791 and has classified all of the stocks traded on American exchanges over the past 225 years by GICS and sector. We have been able to calculate how the Media & Entertainment stocks have grown within the Communications sector over the past 150 years. The graph below illustrates these changes. As the chart shows, up until around 1960, telecommunications represented around 80-90% of the total communications sector.  Not surprisingly, the period when the communication stocks represented the largest portion of total market cap was in the 1920s when the bull market drove up the valuation of entertainment stocks, only to see their values collapse after the 1929 crash when the bull market came to an end. The growth of the Media & Entertainment sector has been steady since 1965, increasing from 10% of the Communications sector in 1965 to 80% in 2018.  One would think that the explosion of the internet in the 1990s would have created a break in this series, but this isn’t the case.  The growth in Media & Entertainment has been steady over the past 50 years.  You can see how the breakup of AT&T in 1983 and the telecommunications revolution that followed favored the Telecommunications industry for a few years, but this only delayed the inevitable growth in Media & Entertainment. The basic criticism of creating the Communications sector out of the Telecommunications and Media & Entertainment is that combining these two industries into the Communications sector is like mixing apples and oranges.  The Telecommunications sector is more like the Utilities sector, including high-yielding stocks with limited growth potential while the Communications sector includes two of the fastest growing companies on the planet, Alphabet and Facebook, as well as the potential for further growth from other sectors within the Media & Entertainment industry. The growth of Media & Entertainment has been a continuous process over the past 50 years.  It is not a recent phenomenon. On the other hand, if you compare the market cap of the Utilities and Telecommunications sector there has been an amazing long-term stability between the two as is illustrated below. Telecommunications has represented 40% to 50% of the Utilities and Telecommunications in most of the years since 1880.  There were exceptions, such as the 1920s when Utilities were the fastest growing sector in the economy and the 1990s when the Telecommunications Revolution exploded, but the 40-50% range has dominated the relationship between the two sectors for the past 125 years.  Contrast this with the growth in the Media & Communications relative to Telecommunication Services that has occurred during the past 50 years.  Combining Utilities and Telecommunications into a single sector and allowing Communications to be a sector unto itself appears to be the logical conclusion of analyzing the long-term trends of these sectors. To us, the logical rearrangement would have been to create the Communications sector as a new sector, and add the Telecommunications sector into the Utilities to create a Utilities & Telecommunications sector.  There are four sectors in the S&P 500 that represented less than 3% of the total market cap in August 2018, Materials (2.49%), Real Estate (2.70%), Telecommunication Services (2.00%) and Utilities (2.88%).  GFD’s Transportation sector represents 2.23% of the S&P 500 market cap. By combining the Utilities and Telecommunications sectors into a single entity, it would now represent 4.88% of the S&P 500 market cap the reduced Communications sector would represent about 10%.  This would resolve the inherent conflict between a rapidly growing Media & Entertainment division within Communications and the low-growth Telecommunications sector. For this reason, Global Financial Data is making this change in its sectors.  Communications is a sector unto itself that excludes Telecommunication Services and the Telecommunication Services is now part of the Utilities & Telecommunications Sector. We invite your comments on these changes.

With Jack Ma predicting that the trade wars between the United States and China could go on for another 20 years, Global Financial Data has added data on tariffs so our customers can analyze tariffs between countries and over time.  With Donald Trump using tariffs as his primary weapon in his global trade wars, it is important to understand what tariff rates are throughout the world. GFD has collected data from the World Bank covering over 2800 series on tariffs from every country in the world.  The data include tariff rates for primary products, manufactured products and all products.  It includes data on both the average tariff rates for countries as well as the most favored nation rates. The data begins in 1988 and extends up to 2016. GFD has also collected data on U.S. tariffs going back to 1790 as the chart below shows. The graph tells an interesting story of the United States.  The Tariff of 1789 was passed to generate revenues for the federal government, so rates remained high for the next 100 years to fund the government.  Tariffs represented over 80% of federal government revenues between 1790 and 1860.  The Tariff of 1789 set American tariffs at a flat 5%.  The rate rose to around 12.5% by 1810 and doubled to 25% in 1812, increased to 35% in 1816 and to 40% by 1820. Alexander Hamilton and others used the infant industry argument, that tariffs could be used to protect young industries from competition until they matured, to justify the protection of American industry. Before World War I, the United States had one of the highest tariffs in the world.  There was a brief period in which tariffs were lowered between 1846 and 1861 as a result of passing the Walker tariff in 1846 and the Tariff of 1857 which lowered the rate to 18%. However, the Morris Tariff, signed by James Buchanan in March 1861 raised tariff rates once again. It should be remembered that the North and South strongly disagreed on the issue of tariffs.  The South was generally opposed to tariffs while the North favored tariffs to protect northern industry. Abraham Lincoln called himself a “Henry Clay tariff Whig” and in 1847 declared “Give us a protective tariff, and we shall have the greatest nation on the earth.” After the Civil War, the Republicans protected American industry with a wall of tariffs. The issue of tariffs was one of the principal issues the nation argued about in the 1890s and 1900s.  It was primarily because of the introduction of the income tax in 1913 that the Underwood Tariff was able to lower rates. In 1915, tariffs represented 30% of federal government revenues. The Smoot-Hawley Tariff, though almost universally opposed by economists, contributed to the shrinkage of trade during the Great Depression. After World War II, the United States promoted trade liberalization in order to increase economic growth and economic integration.  The General Agreement on Tariffs and Trade (GATT) was established in 1947 and went through several rounds insuring that all countries lowered tariffs simultaneously.  NAFTA created freer trade between the United States, Canada and Mexico in 1994.  GATT morphed into the World Trade Organization in 1995 and the European Union worked to eliminate internal trade barriers between member countries. In 2000, China joined the World Trade Organization. Consequently, tariff rates have dropped to historically low levels throughout the world and globalization has enabled billions to leave poverty behind forever.  Most economists are opposed to Donald Trump’s support of using tariffs to fight trade wars with the rest of the world.  Now you can use data from GFD to analyze historical trends in tariffs throughout the world. If you would like a list of the Global Financial Data’s series on tariffs, please feel free to call Global Financial Data today to speak to one of our sales representatives at 877-DATA-999 or 949-542-4200.

The Vereenigde Oost-Indische Compagnie (VOC), or the United East India Company, was not only the first multinational corporation to exist, but also probably the largest corporation in size in history. The company existed for almost 200 years, from its founding in 1602, when the States-General of the Netherlands granted it a 21-year monopoly over Dutch operations in Asia, until its demise in 1796. During those two centuries, the VOC sent almost a million people to Asia, more than the rest of Europe combined. It commanded almost 5,000 ships and enjoyed huge profits from its spice trade. The VOC was larger than some countries. In part, because of the VOC, Amsterdam remained the financial center of capitalism for two centuries. Not only did the VOC transform the world, but it transformed financial markets as well.  

The United East India Company Takes Over Asian Trade

The foundations of the VOC were laid when the Dutch began to challenge the Portuguese monopoly in East Asia in the 1590s. These ventures were quite successful. Some ships returned a 400 percent profit, and investors wanted more. Before the establishment of the VOC in 1602, individual ships were funded by merchants as limited partnerships that ceased to exist when the ships returned. Merchants would invest in several ships at a time so that if one failed to return, they weren’t wiped out. The establishment of the VOC allowed hundreds of ships to be funded simultaneously by hundreds of investors to minimize risk. The English founded the East India Company in 1600, and the Dutch followed in 1602 by founding the Vereenigde Oost-Indische Compagnie. The charter of the new company empowered it to build forts, maintain armies, and conclude treaties with Asian rulers. The VOC was the original military-industrial complex. The VOC quickly spread throughout Asia. Not only did the VOC establish itself in Jakarta and the rest of the Dutch East Indies (now Indonesia), but it established itself in Japan, being the only foreign company allowed to trade in Japan. The company traded along the Malabar Coast in India, removing the Portuguese, traded in Sri Lanka, at the Cape of Good Hope in South Africa, and throughout Asia. The company was highly successful until the 1670s when the VOC lost its post in Taiwan and faced more competition from the English and other colonial powers. Profits continued, but the VOC had to switch to traded goods with lower margins. They were able to do this because interest rates had fallen during the 1600s. In the 1600s and 1700s, the Dutch had the lowest cost of capital in the world. This was because of an innovative idea: if you pay back your loans, your creditors will reward you with a lower interest rate in the future. This wasn’t the way Spain, France, and other kings looked at borrowing money. They often defaulted, and their interest rates remained high. As a result of Dutch fiscal rectitude, the yield on Dutch government bonds fell from 20 percent in 1517 to 8.5 percent by 1600 and to 4 percent by 1700. The Dutch had the lowest interest rates in the world at that time. This pushed the Dutch to invest not only in joint-stock companies, such as the VOC, but in foreign government debt, helping to fund the American Revolution. Another interesting aspect of the VOC was its dividend policy. Some of the dividends were paid in kind, rather than in money, and the dividends varied widely as the table below indicates. The dividend averaged around 18 percent of capital over the course of the company’s 200-year existence, but no dividends were paid after 1782. The VOC provided a high return to investors, but not always in the way shareholders wanted. The VOC basically unloaded its surplus inventories on shareholders in some years, providing them with produce, cloves, spices, or bonds. Some shareholders refused to accept them. Obviously, shareholders want money, not goods, and the three British companies, Bank of England, East India Company, and South Sea Company, learned from this and only paid cash dividends during the 1700s. The average dividends of 20–30 percent of capital were high, but since the price of shares traded around 400 during most of the company’s existence, as the figure below shows the actual dividend yield was around 3-6 percent, better than Dutch bonds, but less than bonds from “emerging market” countries, such as Russia or Sweden.  

Dutch East India Stock Dividend Yield, 1650 to 1795

  As the chart below shows, shares started at 100 in 1602, moved up to 200 by 1607, suffered a bear raid in 1609, moved up to the 400 range in the 1630s, fluctuated as the fortune of the company changed from year to year, participated in the bubble of the 1720s when shares exceeded 1,000, fell back to 600, rallied to 800 in the 1730s, then slowly declined from there. Perhaps no better indicator of the Dutch economy, or the global economy, prior to 1800 exists.  

The Impact on the Amsterdam Stock Exchange

The VOC also transformed the Amsterdam Stock Exchange, causing a number of innovations to be introduced, such as futures contracts, options, short selling, and even the first bear raid. Isaac le Maire was the largest shareholder of the VOC in its early years, and he initiated the first bear raid in stock history, selling shares of VOC short in order to buy them back at a profit. These actions also led to the first government regulation of stock markets, attempting to ban short selling in 1621, 1623, 1624, 1630, and 1632, as well as banning options and other forms of financial wizardry. The fact that these laws had to be passed so many times shows that these regulations were not that effective. One problem for the long-term success of the Amsterdam Stock Exchange was that the VOC and the West Indies Company (WIC) were the only shares of importance that traded on the Amsterdam Stock Exchange. Between 1600 and 1800, no new large companies listed in Amsterdam. Although Dutch fiscal rectitude kept debt and interest rates low, it also helped stifle the growth of the Amsterdam Stock Exchange because government bonds never became a prominent part of the trading on the exchange. Due to the decentralized political nature of the Netherlands, government debt was held locally. There was no large centralized national debt as in France and England, and ultimately, this inhibited the growth of the Amsterdam Stock Exchange. The Netherlands was as decentralized as France was centralized. Because the VOC and WIC so dominated the share market, the company didn’t issue new shares to raise capital. Dutch debt was so small and diversified among its cities that the Dutch invested in foreign debt to find an outlet for their capital. Dutch newspapers of the 1700s often listed the prices of French debt in Paris as well as British Consols, Bank of England stock, the British East India Company and South Sea Company stock in London, but no other debt or equity from Amsterdam was listed. With the exception of colonial trade, until the 1800s no capitalist enterprise required the levels of capital of the VOC and WIC. So the Dutch capital that was available went into debt, not equity. America went to Amsterdam to raise capital, as did Sweden, France, England, Russia, Saxony, Denmark, Austria, and other countries. This provided Dutch investors with higher returns, but didn’t develop the Dutch economy in the way it could have. Unfortunately, the profitability of the Dutch East India Company was highly erratic as the chart below shows (there were 2.5 Guilder to 1 U.S. Dollar). Although there were many years when the VOC was profitable, there were also numerous years when the company lost money, and yet it still paid a dividend in most years, draining the capital of the company and forcing the VOC to take on more and more debt. The death knell of the company came in the 1770s and 1780s when the Fourth Anglo-Dutch War of 1780-1784 devastated the company’s finance.  The company never recovered and it suffered losses for the rest of its life.  The Netherlands were conquered by the French during the Napoleonic Wars and the company’s assets were seized by the British.  The VOC ceased to exist in 1796. Another factor that may have held the Amsterdam Exchange from expanding was the fact that shares could only be registered on a monthly or quarterly basis. The situation was different in London. Not only could British shares and debt be registered daily, but all of the shares were available for transfer. On the other hand, many VOC shares weren’t traded at all. The amount of British and French debt grew throughout the 1600s and 1700s, requiring new investors on a regular basis. Not only did the VOC’s capital remain constant, but centralized Dutch government debt didn’t exist until the late 1700s. Amsterdam failed to provide its investors with new opportunities.  

The Financial Capital of the World Shifts to London

Before the Industrial Revolution, companies were simply too small to require sufficient capital to be traded on exchanges. Shipping had long been a high-risk venture, providing high returns and high losses, and investors diversified their risk by putting their money in a number of different ships. The colonial trading companies of the 1600s and 1700s took financial capital to a different level, allowing thousands of people to invest in hundreds of shipping ventures, diversifying their risk. After the Napoleonic Wars, the center of global finance shifted from Amsterdam to London. Although this process was spread out over several decades, it is amazing that the center of global finance could move from Amsterdam to London so quickly and so easily. There were some things, mostly political, which Amsterdam had little control over, such as the Napoleonic Wars, their occupation by the French, and the loss of its colonies after the war. In retrospect, there were things the Dutch could have done to keep Amsterdam at the center of global finance after 1815, but the trend was inevitable. The Dutch failed to diversify away from VOC and WIC shares and allow other companies to take advantage of local capital markets; they failed to sufficiently develop the bond side of the market because there was no centralized government debt until the late 1700s; they failed to expand the capital of the VOC, but instead chose to borrow, adding to the debt load, which led to the bankruptcy of the VOC and WIC; the VOC and WIC did not sufficiently reinvest dividends for growth; and they failed to offer a large number of securities that encouraged trading as in London. The company failed to raise additional capital when necessary, to limit borrowing, or to fund capital expenditures by cutting its dividend. Since the Netherlands lacked a centralized debt issuer, as the French, British, and Russians did, the Amsterdam Stock Exchange faded in importance after the VOC and WIC collapsed. Foreign government bonds became more prominent in Amsterdam, but even the foreign government bond trading moved to London in the 1820s, where capital was more readily available. It is doubtful whether Amsterdam could have foreseen all the changes that happened, and perhaps they couldn’t have prevented the move of the world’s financial capital from Amsterdam to London that occurred after 1815, but it was a lesson London should have learned. London became the engine of global capitalism for the 19th century, only to lose its place to New York after World War I. The US should understand this lesson as well. The global center of finance must grow, innovate, and be as open as possible. Otherwise, the center will move to someplace that is.