The market valuation of cash dividends: A case to consider

Since early 1956 Citizens Utilities Company has had two classes of common stock which are virtually identical in all respects except dividend payout. One class pays only stock dividends, the other class pays only cash dividends, and the corporate charter requires that the dividends per share on the two classes be of equivalent value. Under an I.R.S. ruling granted to Citizens Utilities in 1955 and a ‘grandfather clause’ in the 1969 Tax Reform Act, the stock dividends are not taxable as ordinary income. (No other publicly held firm has such a ruling and, in general, the 1969 Act made stock dividends of this type taxable.) Given these circumstances, the price-dividend history of the Citizens Utilities shares provides a view of the effects of alternative payout policies which, to an exceptional degree, is free of confounding factors. Close examination of this history implies that, if anything, claims to cash dividends have commanded a slight premium in the market over claims to equal amounts (before taxes) of capital gains.