FINANCE: Tommy Guns Backfire

When most companies are about to pay a dividend, they announce the event at least ten days beforehand, thus permitting brokerage-house cashiers to check up, make sure all stockholders are properly listed on the company’s books. But one day last week Thompson Automatic Arms Corp. (“Tommy” submachine guns) blandly announced it had declared and paid a dividend the day before. Moreover, it was a big dividend—$5.50 a share, a total of $1,391,500. This windfall came from sales to the U. S. Army, France and Great Britain of 4,700 Thompson guns and parts.

The over-the-counter market, where Tommy shares are traded, is usually quiet. So are Tommy shares. But last week both boiled. Brokers, their bookkeepers in a quandary, demanded an explanation. At last, straight-lipped, youthful Frederic A. Willis, Tommy gun’s vice president and cousin of England’s scrappy Prime Minister Winston Churchill, gave his reason for the clandestine payment: “to avoid speculation” in the stock.

For most Wall Streeters, that reason was not good enough. Before the unexpected dividend, Tommy shares were selling for $12.50, much too low for any stock about to pay $5.50. At that price, there were several days of abnormally active trading—200 to 2,000 shares a day, although only 90,000 shares (estimated) are held by the public. After the dividend, the stock jumped to $14.75, a new 1940 high. Rumors started by Thompson’s action included one that its 1940 earnings would reach $10 to $16 a share; this helped the post-dividend rally. Unaccustomed to quick profits these days, speculators figured that any insider who bought before the payment, sold three or four days later, could have cleared $775 on $1,250.

While speculators were peeved at missing the boat, brokerage-house cashiers had a more serious worry: who really owned the dividends? Many a share of stock is held in a “street name,” may be traded five or a hundred times before the ownership is transferred on the company’s books. On a normal dividend day, stocks are traded “ex-dividend.” But having had no notice of the Tommy dividend, buyers who had neglected to transfer their purchase with Thompson felt entitled to the payment. Last week cashiers were still scurrying about, making sure that all who received checks (those on the company’s books) actually owned the stock, trying to persuade others to play square and pass their checks along. The extra (and unpaid) work also ruffled the National Association of Securities Dealers (which furnishes over-the-counter quotations, supplies A. P. and U. P.). This week their quotations committee considered a new resolution: a boycott on quotations of “companies that take such unusual action.”