Studies in Securities Revised 1927 Jas. H. Oliphant & Co. New York Chicago id 99.0 E'@GENTUM res INST UTS BE SCHAFT =n “hy KERRPLE (Al SE Baa N 20ll8 AM Vp BT i STUDIES IN SECURITIES No Securities to Sell Th, w= Gus DECLARED PoricY to which from its earliest history our house has rigidly adhered is that we do not sell securities to our clients. We buy and sell securities for our clients on a strictly commission basis, and do not, as dealers, trade with them. Charges made by us are the standard commission rates. We give close attention to the study of in- vestments and believe that we are capable of giving sound advice regarding the rela- tive merits of securities. We make no charge to our clients for in- formation or suggestions furnished them. Our opinions are not prejudiced by reason of any interest involved due to ownership of securities. ~~ . Jas. H. Oliphant & Co. Established 1898 Members New York Stock Exchange Members Chicago Stock Exchange Members New York Coffee & Sugar Exchange, Inc. NEW YORK 61 Broadway Offices connected Telephone by private wire Whitehall 2200 CHICAGO The Rookery Telephone Central 7691 Studies in Securities ’ Revised 1927 Fifty of the studies of over a hundred different companies prepared and published by this firm during the last five years— Selected as outstanding examples of varied enterprise—Past records brought into relation with the present pg A “a I$ 0) 2 Sr 5 &= Ar 39. * < al 2 Kie\ * ¥o Jas. H. Oliphant & Co. Members New York Stock Exchange Members Chicago Stock Exchange Members New York Coffee & Sugar Exchange, Inc. NEW YORK Offices connected CHICAGO 61 Broadway by private wire The Rookery COPYRIGHT, 1927, BY JAS. H. OLIPHANT & CO. Statements and opinions herein, while not guaranteed, are based on information believed to be reliable. Contents Foreword . Air Reduction Co. Allied Chemical & Dye Corp. Allis Chalmers Manufacturing Co. American Can Co. . . . American Locomotive Co. . . American Smelting & Refining Co. American Steel Foundries . American Sugar Refining Co. . American Telephone & Telegraph Co American Tobacco Co. . . . . Anaconda Copper Mining Co. . Atchison, Topeka & Santa Fe Ry Atlantic Coast Line R. R. Baltimore & Ohio R. R. Bethlehem Steel Corp. . . Chicago & North Western Ry. Columbia Gas & Electric Corp. . Consolidated Gas Co. of New York Corn Products Refining Co. Detroit Edison Co. . . Bele RoR: i. General Electric Co. General Motors Corp. Great Northern Ry. Illinois Central R. R. International Harvester Co. International Telephone & Telegraph Corp. Louisville & Nashville R. R.. Missouri Pacific R. R. Montgomery Ward & Co. PAGE 7 9 10 12 13 15 16 18 19 20 22 24 25 26 28 30 31 33 34 35 36 37 39 41 43 45 46 47 48 50 hl National Biscuit Co. . New York Central R. R. New York, New Haven & Hartford R. R. Norfolk & Western Ry. . Northern Pacific Ry. Pennsylvania R. R. Peoples Gas Light & Coke Co. Pullman Co. . . Reading Co. . . Reynolds Tobaceo Co. Southern Pacifi¢ Co. Southern By. . . . Standard Oil Co. of Indiana Standard Oil Co. of New Jersey Switt &:Co 0. oo Union Carbide & Carbon Corp Union Pacific RB. R. . . United States Steel Corp. Western Union Telegraph Co Woolworth (F. W.) Co. PAGE . 53 54 55 57 59 60 61 62 64 65 67 68 69 71 72 74 75 7 79 80 Foreword FG deference to requests for a more permanent form of the ‘Studies in Securities,”” which are issued monthly by this firm, we have brought up to date, for the most part keeping the original text, a selected group of fifty of the individual ‘‘Studies’’ which have appeared in the past five years and present them herewith. In the monthly issues, the companies to be treated are chosen with a view to both investment character and speculative promise, and from the many thus discussed the fifty herein reprinted are again selected as those which perhaps best present a cross-section of the commercial activity of this country. With few exceptions, they are corporations which combine all of the following qualifications: proven management, long record of substantial earning power and dividend payment, large size and dominance in their respective fields, and sound financial structure. Obviously no attempt has been made to have the list all-inclusive even so far as these qualifications apply. Securities even as humans have character to those who know them. In such brief reviews of large companies naturally only the out- standing points in their past histories and current positions can be touched on, and thus we have chosen to present only what appear to us as the accomplishments in the past and evidences in the present which enable one to judge the character of their securities. The companies covered in these pages afford all forms of corporate investment and speculative securities: long-term and short-term issues, underlying closed mortgage obligations, open and junior mortgages, convertible bonds, guaranteed and preferred stocks, and common stock equities. Our aim herein is merely to present such facts as provide basis for judgment upon the corporate character. Sources are readily available as to details of indi- vidual securities. Although we form at times what appear to us as reasoned con- vietions based on economic conditions regarding price trends (for example, as to the inevitable recovery of old-line securities from war influences, expressed in numerous circulars during the past seven years), we have no particular pride of opinion as to general stock market price fluetuations. Corporate character and trend of earning power are two essentials in forecasting market prices, knowledge of which it is humanly possible to acquire; accordingly, our emphasis thereon. Other factors of a general character (fre- quently conflicting and usually involved) are important and inter- est us, but are at most times difficult of accurate measurement and exact interpretation. Hence, other than to temper enthusiasm with caution as prices rise and conversely doubt with faith as prices de- cline (obviously only a guide), we know of no principle or ‘‘sys- tem’’ to ensure one in selecting the prices at which old-line, sea- soned securities should be bought or sold. Our pride of opinion is in knowing in a measure the character of securities and an attempt is herewith made to give facts upon which to base judgment in respect of the companies treated. JAS. H. OLIPHANT & CO. August, 1927. STUDIES IN SECURITIES A ESP Air Reduction Co. pe LS ae = Eo h S57 The Air Reduction Co. now making its record for the second decade of its corporate life seems established on an annual earning power basis of well over $20 a share available for dividends and depreciation. Record in the ten years ended 1925, of $94 a share aggregate net of which $41 a share was charged off for deprecia- tion of plants and amortization of patents, $30 paid in dividends, and $23 surplus kept in the property, laid a splendid foundation. In 1926, the first year of its second decade, Air Reduction Co. earned $20 a share after expenses and taxes, of which $9 was charged off for reserves, indicating as yet no let-down in the management’s obviously liberal depreciation policy. It is known depreciation on property is charged off at annual rates ranging from 2% to 25% and amortization of patents in sums computed to entirely provide for them by expiration. Thus as of December 31, 1926 plants were carried net at $6,544,000 after reserves of $6,889,000, and patents at $588,000 after reserves of $1,988,000. Clearly the reported earnings for stockholders have been soundly arrived at after such liberal charge-offs, even admitting the tech- nical nature of the company’s business. An eminent chemist and corporate executive once said: ‘‘You must remember that a hoary bearded professor in his laboratory with a test tube in hand may wipe out a million plant investment;’’ and Air Reduction man- agement have apparently the same idea. The depreciation policy has been an outstanding feature of this company. With plants in over 30 cities and distributing its products from 150 warehouses throughout the country, Air Reduction manu- factures and sells oxygen, acetylene, nitrogen and other gases, carbide, and oxy-acetylene cutting and welding equipment used principally by steel manufacturers, foundries, railroads, shipyards, automobile makers and repair shops. Additions and acquisitions (made largely from earnings) have resulted in a well-integrated, rounded-out, operating industrial. ‘With air one of its principal raw materials and its manufacturing process largely automatic, ratio of operating expenses to gross, at 63% in 1926, is relatively low. Gross business has expanded to $12,735,000 in 1926 from $1,173,000 in 1916. Capitalization has been simplified by conversion in past years of bonds and preferred stock into one issue, now outstanding in amount of 211,655 shares of no par capital stock. As of December 31 last, current liabilities were $1,334,000 and current assets $7,520,000 (of which $2,803,000 was cash). Ex- cluding patents, Air Reduction stock has a sound asset value of $80 a share with fixed assets carried at ultra-conservative figures. 91 JAS. H. OLIPHANT & CO. Its quarterly reports for just over a year now have indicated this company is earning in excess of $25 a share a year available for dividends and depreciation. This level of gross profits, the fact that the formative period may be considered past (with a decade’s experience as a guide), and the substantial plant expansion financed from profits form the basis for stockholders’ hopes that future charges for depreciation need not be so large and hence a larger proportion of net may be disbursed in dividends. The dividend rate was $4 a share from 1917 until last fall when it was increased to a $5 basis, with extras of 50 cents a share in 1918 in Liberty bonds, and $1 a year in 1924. 1925 and 1926. A level near 200 for Air Reduction stock indicates the market’s discounting process of better than a $5 dividend for this issue. Conservative management, prudent financial policy, and continu- ous expansion in operations, have placed this stock among those with possibility of split-up in the not distant future and larger income to holders. Allied Chemical & Dye Corporation Allied Chemical & Dye Corporation was six years old December 31, 1926, and its management can point to the following accomplish- ments financially since December 31, 1920: 1—Funded debt of $6,040,547 has been paid off. 2—Minority interests of $4,638,940 have been eliminated. 3—Contingent liability of $1,967,040 has disappeared. 4—Current liabilities (including taxes) have decreased to $13,557,000 from $25,624,000, or by $12,067,000. 5—Current assets have increased to $144,029,000 from $95,638,000, or by $48,391,000 (cash and marketable securities have increased to $94. 420,000 from $22,642,000, or by $71,778,000). 6—Total reserves (excluding taxes) have increased to $112,030,000 from $70,059,000, or by $41,971,000. . These major financial changes together with integration of consoli- dating properties and personnel are the outstanding six year de- velopments, with no apparent effort to ‘‘show’’ earnings. The per share earnings are set forth below, both as reported and including the increase in reserves : Earned per Share 1926..........59.80 1925. 5. . 2.20 1924. oa. 2 7.95 LO8 Sr vi na Th Increase in Reserves 31.80 2.85 2.80 R20 Total $11.60 11.05 10.05 12.70 \ STUDIES IN SECURITIES Earned Increase per Share in Reserves Total 1022.5 coun 35.60 $4.40 $10.00 BLE 220 2.00 4.30 {920%. ..-..... 6.30 unavailable 6.30 *Equivalents also of $2.10 per share in 1921 and $5 in 1920 were charged off for inventory and security losses. Figures for 1920 are of the five companies consolidating December 31. In aggregate Allied Chemical in six years earned gross income after depreciation and renewals of $134,667,000, of which $14,045,- 000 was paid in federal taxes, $4,714,000 was charged off in 1921 for inventory and security losses, $69,545,000 was paid in preferred and common dividends, and $35,545,000 was carried to surplus. During this period as indicated above there was a net increase in reserves (exclusive of tax reserve) of $41,971,000. The six year net increases in surplus and reserves total $77,515.000 or $35.50 a share on the common stock. The capitalization of Allied Chemical consists of $39,284,900 79% preferred stock (a substantial part of which may be among the $80,835,000 marketable securities in the treasury) and 2,178,109 shares of common stock, no par value. The reserves of this com- pany are equivalent to $53 a share on the common. Excluding reserves entirely and $21,306,000 goodwill, the book value of the common stock figures $69.50 a share. Let us examine the integrity of this $69.50 a share book value. The $144,029,000 current assets provide for the entire outside lia- bilities of $13,557,000, par for the $39,284,900 preferred stock (re- tirable price 120) and leave $91,187,000 for the common stock or $42 a share toward the $69.50 book value above given. Assuming the fairness of $7,211,000 ‘‘investments’’ and ‘‘deferred assets,’’ this leaves the plant account for discussion as the remaining tangible asset. Allied Chemical’s plant account is just as interesting as its cur- rent asset position. The plant item is carried at $165,130,000 among the assets; and the credit reserve against plant is $93,606,- 000 (of the total reserves of $115,661,000). The net value of the property item is therefore $71,524,000. We find that from 1920 the gross value of plants increased $23,- 759,000. At the time of the merger in 1919-20 the net value of the plants was given as $93,261,000 and it was officially stated that ‘““this amount represents original cost, less depreciation, and not replacement values. About half consists of construction and acqui- sitions made before 1915.” We know that valuations of assets on subsidiaries’ books were in no case increased in consolidation, and half of the net value of the plant was based on costs in 1914 and [111 JAS. H. OLIPHANT & CO. earlier when a dollar was a dollar. With this understanding the plants were given a net value of $93,261,000 in 1920. Today the plants, increased by $23,759,000 additions in the past six years, are carried net at $71,524,000, actually $21,737,000 less than the figure of 1920. This speaks well for the integrity of the plant book values. It is thus evident the asset value of $69.50 a share for Allied Chemical common stock may be taken as most conservative. Miscellaneous reserves ficure $9 a share on the common stock. Those interested in Allied Chemical believe that the industries this company represents are capable of important expansion in coming years and this lends the speculative feature to its common stock. The constituent companies are as follows: General Chemical Co., heavy acids; Barrett Co., coal tar products; Solvay Process Co., alkalis; Semet-Solvay Co., coke and by-products; and National Aniline & Chemical Co., dyestuffs. The trite phrase, ‘‘the surface has been barely seratched,’’ is believed to apply to the various fields of industry here represented; as witness the company’s recently announced plan for construction of a large plant for the fixation of atmospheric nitrogen. The constituent companies in the first half of 1920 (admittedly a boom period) earned $22,382,000 before depreciation and taxes, and this shows the possibilities of earning power inherent in the properties under favorable trade conditions. The next phase of Allied Chemical’s development could well be a ‘‘blossoming forth’” of earning power, which with its already impregnable treasury position would inevitably mean larger disbursements to stockholders, the $6 basis (increased from $4 which had prevailed since 1921) merely fulfilling the expectation of the original terms of merger. The common stock of Allied Chemical & Dye Corpora- tion represents a sound equity in a permanent basie industry. Allis Chalmers Manufacturing Co. Allis Chalmers Manufacturing Co. since reorganization in 1913 has shown steady progress financially and commercially until today its common stock is a sound $6 dividend payer with $9-$10 a share annual earning power, in 1927 improved by the retire- ment of $16,500,000 7% preferred stock through issue of $15,- 000,000 5% debenture bonds (saving amounting to $1.66 a share on the common). With a complete line of sawmill and flour-mill equipment (flour milling business of Nordyke & Marmon, its chief competitor, absorbed last year), erushing and compressing machinery, electrical [121 STUDIES IN SECURITIES equipment, gas and oil engines, pumps (increased by an important division of Worthington Pump & Machinery Corp.), tractors, and heavy machinery, Allis Chalmers maintains 33 domestic and four foreign district offices and has sales agencies in 20 foreign cities, providing a well established world-wide distributive organ- ization. In the twelve years ended 1926 this company earned a surplus of $21,704,000 available for dividends on its common stock, equal to $83.50 a share, and paid owt $8,100,000 in common dividends ($3,120,000 of this in past two years), or $31 a share. In even the severe test year, 1921, the $4 dividend rate at that time was fully earned and the treasury position of the company at the end of 1921 was the strongest in its history to that date. Earnings per share in recent years have been as follows: 1928.... ¢a.35 “200 1925. ... Ta B 1994... In these six years there was expended for development work an aggregate equal to $9.95 a share additional and there was charged off for depreciation an aggregate equal to $17.10 a share. As of December 381, 1926 current liabilities were $5,718,000 and current assets $33,047,000 including $11,922,000 cash and market- able securities. In recent years’ reports, plant account, patents, and good will have been set forth in one figure, but deducting from total property account the figure of $19,287,000 at which patents and good will were separately carried on the balance sheet in 1920, we find a tangible asset value for the common stock at the end of 1926 of $84 a share. Property account is carried at $41,061,000 with depreciation of $10,229,000 leaving net valua- tion $30,832,000. Allis Chalmers has established itself well in its various lines of trade, increasingly so in the electrical business (which now is said to contribute 40% of gross turnover of $30,000,000), and its common stock paying 6% is assuming investment character, with speculative promise found in possibility of a 7% rate from the savings in preferred stock retirement. 3 American Can Co. A grossly over-capitalized 1901 consolidation, American Can Co. put back into the property out of earnings from 1912 to 1921 the equivalent of $72 a share on the old stock (split-up six for one in [131] JAS. H. OLIPHANT & CO. 1926) before declaring any dividend on the common stock. Except for the 12% in 1916 and 21% in 1917 (war years) the company never, up to 1922, earned over 8% in any year on its common but its record had been fairly stable, In 1922 the conservative policy of husbanding profits began to bear fruit in real earning power. After per share surpluses on the old $100 par stock of less than $3 in 1921 and under $5 in 1920, the earnings were as follows: O08. ic cnn 92275 19235. enn $10.05 1924. ......... 20.50 92D ena 13:50 In this period, the $9,000,000 debenture issue was paid off and working capital (excess of current assets over current liabilities) increased from under $30,000,000 to over $40,000,000, notwith- standing common dividends paid aggregating 2214 9%. This was the new era of American Can Co. In 1926 with unsatisfactory price condition in the trade, the net earnings for the common declined to $10,850,000 from $13,504,000 in 1925 which meant $26.35 a share on old stock against $32.75 the year before. In 1926 a 509% stock dividend and reduction in par value from $100 to $25 effected a six for one split-up of the com- mon stock so that 1926 net equaled $4.40 a share on the new stock compared with equivalent of $5.45 in 1925. Capitalization of American Can Co. consists of $41,233,300 7% preferred stock and 2,473,998 shares of $25 par common stock paying $2 dividend. As of December 31 last, current assets were $52,588,000 (including $15,863,000 cash and Government securi- ties) and current liabilities were $11,612,000, a strong treasury position. Book value of the common shares was $40. As to the integrity of this book value, we find the plant aceount carried at $110,150,000, an increase of $14,277,000 from the figure as of December 31, 1921, whereas in the five intervening years expenditures for new construction aggregated $26,139,000. Furthermore this book value of $40 a share is figured after de- ducting $10,324,000 reserves, which includes $4,060,000 inventory reserve and $4,096,000 insurance reserve. Dominating its industry as a producer of containers for food and other products (three or four times larger than its nearest com- petitor), American Can Co. has plants in thirty-eight cities of the United States as well as others in Canada and Hawaii, Its business is normally of a stable character. In 1925 and 1926 the pack of canned foods was large, and owing to this overproduction outlook is for a reduced pack in 1927. A large proportion of the 41 Tam STUDIES IN SECURITIES business, however, is in containers for products other than food. The $2 dividend is well protected (in 1926 a balance of $5,902,000 was carried to surplus after $4,948,000 common dividend paid) and return of better conditions in the industry should mean extras. American Locomotive Co. Except for an excursion into the automobile business (estimated to have cost the company $7,000,000) and ammunition making during the war, the American Locomotive Co. from organization in 1901 to the 1926 merger with Railway Steel Spring Co. was confined exclusively to the manufacture of steam locomotives. The fact that in 1925 the output was the smallest of any year in its history may have provided the final urge to diversify somewhat the activi- ties of this company. The violent character of the business is indicated in the figures of its locomotive output over a several years period: 1913 (June 30) $50,000,000 1922 (Dec. 31) $129,000,000 1915 wy 8,700,000 1923 e 90,000,000 1919 £é 108.000.000 1925 2d 27.000,000 Intervening years showed sharp fluctuation, the three years ended June 30, 1918 having the benefit of $85,700,000 aggregate ammuni- tion output. The maintenance of war profits in liquid form changed completely the company’s financial condition and dividend policy, though the nature of the business continued ‘‘prince or pauper.” Working capital increased from $12,327,000 June 30, 1914 to $46,436,000 December 31, 1923. Thus while earnings dropped to only half the preferred dividend in 1925 from $21 a share on the common in 1923, yet common dividends paid in 1925 totaled $9,000,000 ($8 regular and $10 extra) compared with but $2,500,000 in 1923 ($5 a share). Similarly the integrity of the plant account was strengthened from profits. On June 30, 1914 property investment was carried at $52,609,000, later reduced $1,500,000 by sale of plants. In the nine and a half years to December 31, 1923, $15,255,000 was ex- pended on additions and betterments and $13,619,000 charged off for depreciation. This would indicate a real property valuation December 31, 1923 of $54,245,000, whereas it was carried on the books at $37,531,000, thus squeezing out $17,000.000 of intaneibles. Up to the absorption of the Railway Steel Spring Co., American Locomotive Co. capitalization had remained unchanged since or- [15] JAS. H. OLIPHANT & CO. ranization, except for the exchange of two no par shares in 1923 for each $100 share of common stock. Issuance of share for share of preferred stock and two-thirds of a share of common for one of Railway Steel Spring common in 1926 makes American Locomotive Co. capitalization now: $38,389,600 7% preferred and 770,000 shares of no par common stock. There is no funded debt and only $432,000 subsidiary obligation. As of December 31, 1926 current liabilities of the enlarged com- pany amounted only to $4,329,000 and current assets totaled $55,- 008,000, including $32,794,000 cash and marketable securities. Combined plant account was $58,920,000 after depreciation, and total asset value of the common stock after all other reserves was $90 a share. Thus the American Locomotive Co. starts on its new basis in splendid cash shape, with plant account on a conservative valuation {recent policy has been concentration in efficient plants and dis- mantling of others) and its business at last enjoying a degree of diversification. Railway Steel Spring Co. plants make steel springs and tires for car wheels which have a relatively stable market. This acquisition was analagous to American Steel Foundries’ ab- sorption of Griffin Wheel Co. and American Car & Foundry’s entry into bus manufacture. The speculative feature of the locomotive business is found in the development of the three cylinder locomotive and the oil electric engine, the latter in conjunction with Ingersoll Rand Co. and General Electric Co. The present period furthermore has the advantage of following two years of exceptionally small demand for locomotives with fair prospect of change in this respect. With production considerably below capacity in 1926, the first year of combined operation (and this only from May 14 including Railway Steel Spring Co.) the year’s net showed $7.45 a share on the common, on the basis of enlarged capitalization. American Lo- comotive preferred stock is in the first group of industrial senior stock issues, and its common while still speculative in its nature is by the company’s recent expansion much nearer investment character. American Smelting & Refining Co. In the four years ended 1926 American Smelting & Refining Co. axpended $32,162,000 on new undertakings and improvements toward the further diversification and extension of its opera- [16] STUDIES IN SECURITIES tions. This period too marks the real return to normal conditions after almost a decade of war influences with abnormally favor- able and adverse effects ($25 a share earned on the common in 1917 and under $3 a share on the preferred in 1921). The record of net income and of earnings per share of common stock shows the trend in the past five years: Net Income 0 er erate rs .$17,761,000 B25. sea oe ns oe 8 15,091,000 1924...%.% 11,187,000 1928. vereernrs 8,925,000 1922. 5,918.000 Surplus for Common $23.38 19.17 12.60 8.89 3.98 American Smelting & Refining Co. is the largest smelting and refining business in the world. This phase of its operations is about six times its mining activity in size. Its properties are in the United States, Canada, Alaska, Mexico, Peru and Chile. Its principal products are copper, lead, silver, zine, gold, and coal, together with numerous semi-finished products and by-products. Developments in the last five years include the Rosita coke plant with numerous by-products and the Parral unit in Mexico, a con- centrator for gold and silver and smelter for copper in Peru, and a copper rod and wire plant at Baltimore, among others. Recent years’ capital expenditures are increasingly reflected in income account. Capitalization consists of $48,746,900 5% and 6% bonds, $50,- 000,000 7% non-callable preferred stock, and $60,998,000 common stock. As of December 31, 1926, current assets were $91,137,000 (including cash and U. S. Government securities of $34,520,000) and current liabilities were $19,674,000, a splendid position. Asset value of the common stock after deducting all reserves was $140 a share. Charge-offs from earnings (before surpluses shown in above table) were made for depreciation, obsolescence and ore depletion aggregating $24,037,000 in the four years 1923-6 or $40 a share on the common stock, $10 per annum. After suspension in the war deflation year 1921, dividends were resumed in mid-1923 at a $5 rate, stepped up to $6 in February, 1925, to $7 in November, 1925, and to current $8 in November, 1926. With no change in the number of shares outstanding over the years, earning power above the $20 a share a year level, and recent capital expenditures steadily increasing in productivity, the American Smelting & Refining situation seems to contain probability of stock dividend or split, following other old-line industrials. The widening base of its operations makes for more stability in results in coming years than appears in the past record. 1171 JAS. H. OLIPHANT & CO. i American Steel Foundries In 1926, which was with two exceptions probably the worst in 25 years in the railroad rolling equipment business, American Steel Foundries earned its $3 dividend with $1.49 a share to spare. This is the more striking when one recalls the checkered career of this company in pre-war days. Two factors have brought about the change: (1) war profits were husbanded and in the eighteen years since the capital readjust- ment in 1908 out of $43,778,000 aggregate earnings dividends were paid of $21,320,000, leaving $22,458,000 plowed back into the property (largely into working capital) or $25 a share on present common stock; and (2) in 1919 the Griffin Wheel Co. was acquired which with the renewal character of its business has stabilized American Steel Foundries’ earnings. Thus the company, according to December 31, 1926 balance sheet, had current liabilities of $3,278,000 and current assets of $21,- 177,000 of which cash, Government and other securities totaled $12,143,000. Working capital of $17,898,000 would provide 110 (redemption price) for $8,713,000 7% preferred stock and leave $9.20 a share for 902,745 shares of no par value common stock (company has no debt and only $305,000 subsidiary stock obliga- tion). In addition, net capital assets provide $38 a share, includ- ing probably $4 or $5 for good will (figure not available), so that book value of common totals $47 a share. American Steel Foundries is the largest producer of steel castings, sold for new construction, mostly of railroad equipment but also of steamships and machinery. In 1919 through issue of $8,481,000 preferred stock, the Griffin Wheel Co. was acquired, which is the largest maker of iron car wheels, 85% of which year in and year out go for necessary replacements. Griffin Wheel Co.’s $4,300,000 6% preferred was retired in 1925 (American Steel Foundries’ old debt of $6,836,000 wiped out by 1923) leaving capitalization as above described. Figured on present number of shares as increased by stock divi- dends of 18% each in 1920 and 1922 and 25% in 1925, earnings have been as follows: 1928... ....... 54.40 1025. cue... 4.50 1924... 4.60 1923. . 7.60 1922. .0vees..32.50 1921.....defic"" 28 1920. . A 1919. The current $3 annual dividend has been maintained since 1920 C181 STUDIES IN SECURITIES although by stock dividends 74 shares have been added to every 100 held in that year. American Steel Foundries has shown its ability to cover dividend requirements in recent years of poor railroad equipment business. In view of rich treasury position, the realization of long promised railroad buying should provide earnings that could be translated into favorable dividend action. American Sugar Refining Co. As the sugar situation of the world gradually is subsiding from its cataclysmic variations of the deflation period, so is the Ameri- can Sugar Refining Co. (the dominating factor in the trade) steadily returning to its old time position of established earning power. A fluctuation of 197 cents in 1920 in the price of raw sugar compared with a normal year’s range of about a cent and stag- cering losses on customers’ contracts interrupted this company’s splendid record of thirty years’ dividend payments on its common stock, averaging 8.839% annually—never less than 79% except in 1900 when 614% was paid. There followed a four year period 1922-5 with no payment on the common shares, until restoration at the current 5% rate in January, 1926. The preferred divi- dend was maintained throughout, though the market price of 6714 in 1921 evidenced the doubt of even its maintenance, and in that year only 2% of its 7% was earned. The trade condition even in more recent years has been erratic, though progressively improving. The range of fluctuation be- tween high and low price of raw sugar, refining profits and earn- ings per common share in the past four years appear as follows: Range in Raw Refining (Cents) Profits 1.1875 "7.092,000 1.125 277,000 2.8125 “228 000 . 3.375 993.000 *1.088. In 1926 there were 85 changes in the price of raw sugar against 115 in each of preceding three years, and accepted estimates of sugar production of the world for 1926-7 crop show the first decrease in seven years, auguring, it is hoped, an approach to former stabilized conditions. The chaotic post war period naturally was not survived without Some fundamental changes in American Sugar Co.’s old-time rich [191 JAS. H. OLIPHANT & CO. complacency. In 1922 $30,000,000 15-year 614% debentures were issued and are still outstanding, the only change in its capitaliza- tion of $45,000,000 7% preferred stock and $45,000,000 common stock. In 1923-4 holdings in Great Western Sugar Co., Michigan Sugar Co. and Continental Sugar Co. were sold in whole or part at a substantial profit over book values. Reduction thus in its beet sugar interests has been offset by increased investment (now over $30,000,000) in cane sugar properties furnishing about 13% of the company’s requirements. Refining facilities have been mod- ernized with resultant economy. Cooperage, molasses and shipping contribute to operating income and income from investments in 1926 was $2,045,000, including that from its Cuban producing properties. The treasury position at the end of 1926 was strong. Current assets were $68,888,000 (including $23,105,000 cash and $21,- 941,000 loans) and current liabilities only $7,072,000. The item remaining of the unfortunate story of undelivered customers’ con- tracts of 1920 is down to $1,051,000 compared with $15,113,000 as of five years previous. American Sugar Refining Co. is the largest producer of a single food product in the world and few companies in other industries (except the United States Steel Corp. and the Standard Oil com- panies) have so highly integrated an operation—production, man- ufacturing and marketing. Problems still remain. Ever since the fateful month of July, 1914 sugar has been under the influence of governmental interference and still is. Import duties and taxes have been increasingly applied by foreign countries. Refining capacity in the United States is 50% in excess of needs and Cuban production above requirements. The American Sugar Co. however is again in good treasury position with modernized plants and the speculative opportunity in its stock is found in the prospect for further even though irreg- ular progress toward former stabilization in the sugar industry. American Telephone & Telegraph Co. About 514% earned on an average $2,654,000,000 Bell System plant investment during 1926 would have provided for the 9% dividend on $979,026,000 average outstanding American Telephone & Tele- graph Co. stock. Actual realization of less than 7% return meant 11.95% on the stock not counting in the equivalent of 2.45% more in the undistributed earnings of 90%-owned operating subsidiaries. With a fair return from public utility property recognized to be [201 STUDIES IN SECURITIES 7% or 8%, the basis for Telephone’s rates and dividend looks to be solid. Explanation of the difference in earnings rate on the property and on the stock of course lies in a system capital structure of $921,523, - 000 funded debt, 81% of which bears 5% or lower interest, $1,263,- 703,000 stock, $109,660,000 of which being preferred receives fixed dividends, and $839,982,000 surplus and reserves, bulk of which represents earning assets additional to the par value of the stock. Totals include $385,190,000 bonds, $1,064,328,000 stock, and $291,- 095,000 surplus, reserves, and stock premium realized, of American Telephone itself. As center of the system, American Telephone owns over 90% of the equity in the twenty-four regional Associated Companies, which be- ginning 1927 owned and operated 12,816,000 telephones and con- nected with 4,758,000 more, such as in rural lines, and which the parent company co-ordinates and finances; also, it owns over 98% of Western Electric Co. stock, the business of this company being 90% the supply of Bell equipment to the system, and jointly the two companies conduct the great research laboratories; further, American Telephone itself operates the long distance lines, includ- ing the new transatlantic radiophone and picture transmission in this country. Besides dividends from subsidiaries and interest on loans, Ameri- can Telephone receives a fee for services including the supply of telephone instruments which, as included in operating expense by different companies, has occasionally proved a political target in rate discussions. This charge beginning 1926 was reduced from 415% to 4% of gross revenues and total amount of $29,850,000 in the year is estimated to have just covered actual cost. Likewise during 1926 an adjustment of long distance tolls voluntarily re- duced revenues $3,000,000 annually. All in all the rate situation of the Bell properties is satisfactory and some reductions are prob- able where new operating economies warrant. A dollar received for telephone service has been divided for actual traffic expenses and for dividends and surplus, these being the principal varying items, roughly as follows, for the Bell system: Cents per Revenue Dollar Traffic Expense Net Income 24 L926. 1925. . 1924... 1923..%.% [922.5% LOZ ives visa a mre A 1920... EE 101" ~ ‘ ? A i | 1 7 121 JAS. H. OLIPHANT & CO. In part the gain in net income reflects the policy of financing by stock in substitution for bonds whereby dividend requirements are relatively as well as actually larger. Of traffic cost some 85% is for wages and the declining tendency indicates both more reason- able employment schedules and installation of automatic switch- ing equipment which last December 31 was serving 15% of all owned telephones. Abatement of demand for telephone service is not yet in sight. The investment in plant was 2,783 million dollars ending 1926, 1,363 in 1920, and 667 in 1911, having doubled in the last six years and in the nine preceding. Mainly the continual need for funds is met by sale of stock at par. Six offerings were made from 1901 to 1916 and subsequently one each year in 1921, 1922, 1924, and 1926, usually in one to five or six ratio. Earnings shown for American Telephone stock have been over 11% but below 12% each year beginning 1920, just exceeded 10% in 1919, and were over 9% but less than 10% in seven prior years. Dividends have been 99% since 1921, were 8% in fifteen years there- tofore, and at least 714% has been paid during a forty-five year period. Value of rights in the last three subscriptions has ranged from over $2 to over $6 each providing if sold an ‘‘extra divi- dend.”” American Telephone stock deserves that investment con- fidence of the world’s greatest army of exceeding 400,000 stock- holders which price stability irrespective of general market con- ditions indicates American Tobacco Co. The great change in the tobacco business since the so-called trust was broken up fifteen years ago has been the phenomenal gain in cigarette sales. Current 90 billions output contrasts with little over 10 billions in 1911 and 25 in 1916. Annual increases were 20.3% in 1923, 10.2% in 1924, 12.6% in 1925, 11.9% in 1926. A value exceeding $500,000,000 attaches to a year’s production and the few companies dividing it rank as important industrial enter- prises. The ‘‘Lucky Strike’’ brand developed by American To- bacco Co., although at present led by the ‘“Camel’’ and perhaps the ‘‘ Chesterfield’’ brands marketed by two one-time subsidiaries, is increasingly favored, and the company has a score of other products steadying its sales. Universality of the cigarette is ex- hibited by advertising of ‘‘Lucky Strikes’’ with prima donna testimonials. Under the competitive conditions during the fifteen years past, the American Tobacco Co. earned $256,392,000 total net after roo STUDIES IN SECURITIES ER taxes, or $17,093,000 average annually comparative with the rec- ord for a single year of $22 549,000 in 1926. After deduction of bond interest and preferred dividends, $199,194,000 total was left for the common stock and $137,600,000 or 69% was dis- tributed, evidencing the liberality possible in an established busi- ness in this field. As for stability of income, the 1921 year, so disastrous elsewhere in industry, was the best American Tobacco had up to then enjoyed. Present capitalization consists of $1,150,000 funded debt, $52,- 700,000 6% cumulative non-redeemable preferred stock, and $40,- 242,400 common and $57,399,100 common class B non-voting stock of $50 par or 1,952,830 shares in equity. Surplus beginning 1927 stood at $34,948,000, which was not far below the $40,095,000 of 1911 notwithstanding payment in 1920 of $38,375,000 or 75% stock dividend, and as equal to 36% of the common stock it would form the basis for a second but more moderate stock distribution should the management see fit. Figured on shares of $50 par value, into which the $100 shares were divided in 1924, the earnings of recent year: “low: J92- ct i EE 1922 1922 1921. Only a single item of total income is stated by the company and amounts taken out for advertising expense and for property up- keep may only be conjectured to be large. Present value placed apon good-will, brands, ete., is $54,099,000, there having been no increase since 1913 despite huge outlays representing perhaps in part a capital as well as a current expense. Plant is on the books at $9,607,000 against $9,203,000 five years earlier. Furthermore, income includes dividends received from subsidiaries which might pay more, such as 8% from $10,351,000 American Cigar Co. common stock, 529% owned, having 119% or 129 earnings. Dividend rate on American Tobacco common, which had been 12% since the 1920 stock distribution, and at the nearly equivalent rate of 20% on the smaller stock issue since 1912, was increased to 14% or $7 with the December, 1924, quarterly payment, and again to $8 just a year later, when $1 cash extra was simul- taneously paid. A company practically free from funded debt, with current lia- bilities $2,199,000 against $97,685,000 current assets including $16,450,000 cash, and a fifteen-year record of steady growing earn- ings and dividend liberality, American Tobacco has the qualifi- cations necessary to place its stock among investments. [231 JAS. H. OLIPHANT & CO. Miata 7 Anaconda Copper Mining Co. Anaconda Copper Mining Co. is to the copper industry what the United States Steel Corp. is to the iron and steel industry, the most completely integrated unit in the business. After occupying for forty years the position of world’s largest producer of copper and silver, with an important output of zine, lead, gold, arsenic and other metals, besides treating on a custom basis substantial amounts of ores and metals for other producers, Anaconda in 1922 acquired the American Brass Co., the world’s largest manufac- turer of brass and copper fabrications, at a cost of about $45,000,- 000, and in 1923 bought for about $77,000,000 a control of the Chile Copper Co., having one of the world’s most valuable copper ore bodies with the lowest cost of any large scale producer. Chile and Anaconda control two of the largest copper properties and American Brass Co. is the world’s largest consumer of copper. Andes Copper Co., similar to Chile, a huge deposit of low-cost ore, is now ending the development stage and about ready to blossom. forth. Refining properties, timber lands, coal mines, and numerous other activities round Anaconda into one of the country’s outstanding commercial units. Its timber lands and coal properties represent sufficient supplies for the company’s own requirements and permit large outside sales. This is a brief and inadequate description of the activities repre- sented in this company’s capitalization of $214,044,000 bonds (in- cluding $40,000,000 of the Andes property), $1,919,356 minority interest in subsidiary companies and $150,000,000 capital stock consisting of 3,000,000 $50 par value shares. The expansion in capitalization came in 1923 when the largest piece of copper finan- cing on record ($100,000,000 first mortgage 6s and $50,000,000 con- vertible 7s) arranged for the absorption of American Brass and Chile control. The copper industry has been one of the slowest to recover from the post-war collapse when world stocks of copper were 1,139,000 tons. Since that time the prices of some of the non-ferrous metals have been entirely satisfactory but copper has been a laggard. Anaconda’s record of net income available for dividends has been as follows in the past six years beginning with 1921 when most of the mines of the country were closed down : 10, 1925... 1924... 2023.0 922... “001 Net Income .$14,226,000 «+ 117,541,000 6,719,000 8,768,000 ee 3, 531.000 ...deficit 17,000,000 [241 Per Share 4.74 5.84 2.24 2.92 1.18 STUDIES IN SECURITIES Intense competition by the copper selling companies at home and abroad, as productive capacity has been so great, has kept the price of the red metal abnormally low. Operations of the Copper Export Association, it is hoped, will alleviate this situation. At the close of 1926 Anaconda’s treasury position was strong. Cur- rent liabilities totaled $20,021,000 and current assets $115,561,000 including $28,312,000 cash and marketable securities. Copper is a metal for which no substitute has ever been found. Its consumption is in fundamental industries and expansion in de- mand has been continuous except for the abnormal period follow- ing the tremendous output of war years. Anaconda Copper Min- ing Co. occupies a dominating position here; its big expansion has been successfully accomplished ; its management and financial con- dition is excellent; its stock, paying $3 dividend, is the medium for participation in the copper mining, refining, and fabricating business. Atchison, Topeka & Santa Fe Ry. Hardly due to luck the earnings of Atchison, Topeka & Santa Fe Ry. were substantially greater in 1926 than ever before. A favor- able set of circumstances simply brought to light the earning ability secured by long continued heavy investment of surplus. Last financing was in 1916 and from 1917 to 1926 Atchison turned approximately $195,000,000 surplus income into the property. Theretofore, according to 1916 official statement, since the start in 1896 about $343,000,000 had been spent for improvement and extension and but $225,000,000 of this was provided by sale of bonds or stock. Also $101,010,000 has been accumulated for equip- ment depreciation beyond actual retirement needs. Against a book value of $244 a share of common stock, excluding the $43 additional in equipment reserve, the earnings do not seem extraor- dinary, viz. : 1926. 0, ... . 223.42 LORE Er 1924... 15.46 1923... a 0.315.458 1922..." 12.42 1921 12.13 Road and equipment beginning 1927 had $878,000,000 depreciated value upon which 6% earnings would pay 4.07% average interest on $277,178,000 bonds and 5% dividends on $124,173,000 pre- ferred stock leaving 159% for $232,410,000 common stock. Per- haps the true value of transportation property at current costs is some $300,000,000 more and if so the legitimate operating earnings on the common stock would be half as much again. In addition [251 JAS. H. OLIPHANT & CO. the income from other sources has closely averaged $6,555,000 or 3% on the common during the past five years. Such non-carrier investments include oil companies meeting two-thirds the rail- road’s fuel needs, a lumber company supplying ties, and land around ten million acres. Atchison values the entire stock of the principal oil company on its books at $182,000 whereas it paid $18,250,000 dividends 1919 to 1925 including $1,000,000 and $2,000,000 in 1924 and 1923 comparative with $6,143,000 and $5,936,000 earnings. Approximately the oil properties in 1926 earned $5,000,000 after reserves and paid $2,500,000 to Atchison. Otherwise the conservatism of the management appears in its statement year after year that ‘neither this company nor any of its auxiliaries has any notes or bills outstanding’’ and likewise in maintenance of large balances in the treasury, $69,495,000 cash or United States Government securities when last reported. Indicative of the growth of the railroad, the gross operating rev- enues passed $100,000,000 in 1909, $200,000,000 in 1919, and $250,000,000 in 1926, and the net income $20,000,000 in 1909, $30,000,000 in 1916, $40,000,000 in 1923, and jumped above $60,000,000 in 1926. The Atchison main line, Chicago-Los Angeles, either double-tracked or alternately routed, with 110- pound rail now standard, is the stem of a 12,120-mile system cov- ering the Southwest, where wheat has doubled, cotton increased more, and oil become considerable, all within a decade. After paying 6% common dividends since 1910, Atchison raised the rate to 7% in March, 1925, and commenced to pay extras at the annual rate of 3% additional in March, 1927. In the treasury is $100,000,000 common stock the issuance of which in any usual manner was authorized a year ago and this and a surplus nearly 150% of the junior stock outstanding give solid grounds for a capital distribution. Physically the road being next to perfection, the earnings likely to hold around 20% per annum can well be at least half disbursed in one way or another, and until established with a higher regular dividend this investment stock has consider- able speculative attraction. Atlantic Coast Line R. BR. Itself operating 4,996 miles of road, Atlantic Coast Line R. R. has half or greater interest in 9,471 miles additional, and the equity in the whole is vested in 823,427 common shares, instead of the millions outstanding against systems of approaching size. Within the past five years the rewards of long development have commenced to come in. Earnings 1922 to 1926 were $72,630,000, T9R1 STUDIES IN SECURITIES and common dividends $28,121,000, leaving $44,509,000 surplus. During the nineteen and one-half years previous, $115,511,000 was earned, $69,298,000 distributed, and $46,213,000 retained, or little more. To the regular 7% dividends paid since 1917, following at least 5% each year from 1903, extras of 1% in 1924, 29% in 1925, and 3% in 1926 were added, but with five year payments totaling $41 per share and earnings $106 the treatment of stockholders con- tinues conservative. A privilege, however, to subscribe for 20% additional stock at par was given late in 1926, and subsequently the declaration of 114% semi-annual extra dividend indicates a total 109% rate to be maintained, resulting in a further gain. Management of Atlantic Coast Line avowedly is paying the extra dividends from income other than from operations. Mostly such revenue comes as dividends from Louisville & Nashville stock of which 569,700 shares or 51% are owned. Dividends at the present 1% rate pay interest on $35,000,000 bonds secured by these hold- ings and leave the equivalent of 3.37% on 823,427 Atlantic Coast Line shares. The table below gives actual earnings on 685,862 shares of Atlantic Coast Line stock, earnings as they would have been, without allow- ance for employment of $13,756,500 subscription receipts, on 823,427 shares outstanding since early 1927, and as applied to these present shares the due proportions of undistributed earnings of Louisville & Nashville : 1926. 1925. 1924 1923. 1922 On Actua’ On Present $20.10 22.40 17.20 5.60 10 I. & N. Equity "6.96 7.23 AAD Had not Atlantic Coast Line increased maintenance $3,173,000 in 1926 the showing would have surpassed 1925 for $3,089,000 addi- tional gross business was handled with but $2,206,000 greater transportation cost. Unlike most others this road makes two-thirds of the year’s earnings in five months December-April. Indica- tion is for somewhat lower 1927 earnings but after a halt the six states served appear ready to march on again. By 1925, the main line, Richmond to Jacksonville, had been vir- tually double-tracked, in 1926, 63 miles of new first track in Florida were put in operation and 110 miles of line were equipped with automatic signals, showing how extension and improvement still proceed. At $157,679,000, however, Atlantic Coast Line funded debt is only $14,485,000 more than in 1917, and is far less than $82,342,700 common stock plus $4,829,000 premium realized plus 1271 JAS. H. OLIPHANT & CO. Es $95,178,000. surplus. Book value of the common, a negligible $196,700 of preferred being outstanding, is $221 a share, to which the Louisville & Nashville stock alone of investments if carried at market instead of 86 would add $40, a total approximating the record high price of 268 touched in 1925, since when the subserip- tion rights ruling at about $18 value have been deducted. As the star among rail stocks having equities ‘‘hidden’’ in subsidiaries, Atlantic Coast Line R. R. common has speculative pos- sibilities based on solid ground, while a total 10% dividend earned twice or thrice allows investment on fair terms. Baltimore & Ohio R. R. A century rounded out in 1927 makes Baltimore & Ohio R. R. the oldest American railroad and few undertakings of any kind antedate it. Survival has been with a single reorganization, which was effected in 1899 without foreclosure, and with a record of common dividends in all 27 of 96 years since in 1831 the first was paid. The current subscription to 41.6% more common capi- tal at 10714 in contrast with a price level of 30 for the stock seven years ago shows the property to have lost no vigor in its ace. By issuing $63,242,500 common stock and, of the $66,543,000 pro- ceeds net after underwriting commission, using $35,875,000 to re- deem $35,000,000 6% bonds, Baltimore & Ohio will have a capital structure of $546,973,000 funded debt, $58,863,000 4% preferred stock, and $215,187,800 common stock, latter being increased from 19.2% to 26.2% of total. The remaining $30,000,000-0dd will presumably pay for a third of the 93% of Wheeling & Lake Erie Ry. stock bought jointly with New York Central and ‘Nickel Plate’’ and for the 35% interest in Western Maryland Ry. acquired since 1926 also. Included in 99,331 shares of Wheeling owned by Baltimore & Ohio are 38,397 of prior lien 7% preferred with divi- dends accrued since November 1916, while 311,839 shares of Western Maryland include 144,789 of 7% first preferred with accumulation from July 1918, together $12,000,000 present arrears not impossible of at least part payment which would cut down the whole investment cost. Just a third of Baltimore & Ohio capitaliza- tion will be stock, if the non-cumulative preferred is counted in, so the former topheaviness is substantially corrected. Actual earnings on 1,519,454 common shares, the earnings figured on 2,151,878 shares allowing for bond retirement but not for em- ployment of the balance of proceeds from new stock, and the operating expense ratios have been as follows : [281 STUDIES IN SECURITIES On Actual On Increased Oper. Ratio 1926... £17.20 $13.12 73.8% 1925.... a 9.54 75.4 1924... 7.47 77.0 1923... 10.30 18.0 ok Based on six months increase of exactly $1,500,000 in net income, the calendar year 1927 results would equal $12.85 per share of the enlarged common stock issue, since interest on the 6% bonds will continue until the January 1 redemption while all the new stock will not be issued until the December 1 final payment. Some further trimming of expenses should be in store, particularly as Baltimore & Ohio freight is 45% in cheaply moved bituminous coal, and a 70% operating ratio would add about $4.50 to common share earnings. The restoration of common dividends late in 1923 after a lapse of four years was at 5% rate. This with the December 1926 quar- terly payment was increased to 6% and 14% extra paid to make a total 6% for the year. From 1906 to 1914 69% was regularly paid from earnings at considerably lower rate than now and on past policy is based a reasonable expectation of 7% dividends to some. Following the 1924 and 1925 refunding of $135,025,000 bonds in- cluding nearly $120,000,000 314s with $2,137,000 consequent in- crease of annual interest, the 1927 financing frees Baltimore & Ohio from consideration of any important maturity prior to $63,- 250,000 414s in 1933, and thereafter to 1941, excepting $19.- 030,000 miscellaneous amounts. Destiny is believed to involve a closer alliance with the 1,140-mile Reading Co. and its 53%-owned subsidiary 691-mile Central R. R. of New Jersey in combination providing an entry to New York tidewater having unequalled room for development. With new purchases during 1926, Baltimore & Ohio at December 31 held 437,100 shares of Reading preferred averaging 40.21 cost and 262,900 shares of common averaging 40.66, the aggregate $28,- 268,000 being $20,000,000 below market quotations. This repre- sents 25.01% of Reading Co. stock and with practically identical holdings by the friendly New York Central the basis for a closer relation is soundly laid. Incidentally, Baltimore & Ohio in its treasury has stock in the segregated Reading coal property of nearly JI2000000 market value the disposal of which before 1928 is ecreed. The genuine value of the $215,187,800 Baltimore & Ohio common Stock soon to be outstanding is to be measured not only by the $81,483,000 protection in accumulated surplus but also by the fact [291 JAS. H. OLIPHANT & CO. that $170,847,000 of the issue represents $174,147,000 cash paid in of which 629% in the 1901-1906 period was in hundred cent dol- lars. Its property and finances now in good order, this major trunk line system is ready to partake fully of whatever prosperity the country has, and the stock is establishing a surer place among in- vestment equities. Bethlehem Steel Corporation The existing 7,600,000-ton ingot capacity of Bethlehem Steel Corp. compares with 8,050,000 in 1921 before the Lackawanna and Midvale-Cambria acquisitions, with 848,000 in 1914 before the war expansion, and with 130,000 in 1905 following organization. The war winnings were made permanent, the inflated or otherwise doubtful values in plant additions were extinguished, by dis- posing the profits from 1915 to 1921 only $27,095,000 for common dividends against $100,998,000 reserved for depreciation, ete., and $100,162,000 turned into surplus. Bethlehem in 1922 reported that ‘adequate adjustment’’ had been effected. The subsequent step was absorption of Lackawanna Steel in October, 1922 and the Midvale and Cambria properties in March, 1923 which was accomplished by exchange of $132,790,000 ($12,- 500,000 preferred) Bethlehem stock for $182,286,000 (later writ- ten down $25,514,000 to be conservative) net book value of assets. In the years since, including 1926, roundly $90,000,000 has been devoted to construction of finishing mills (bar, wire, tinplate, and structural) and to modernization of plants (with electric power, new machinery, ete.) so that products now are diversified into a practically complete line and costs are reduced as much in some plants as $5 a ton. Aside from increases due to issuing stock and assuming bonds in consolidation and ‘to converting 8% into 7% preferred stock at a premium, the net addition to capitalization from 1921 to 1926 was less than the $35,000,000 preferred stock sold early last year. Balance of funds for improvement is represented in $22,025,000 surplus earnings and $55,860,000 depreciation during five years to December 31 last and some $20,000,000 liquidation of inventories. Meantime, largely owing to plant rearrangement, the average rate of operation was but 68.2% of capacity in 1923, 58.2% in 1924, and 70.83% in 1925, advancing to 81.1% in 1926. Beyond argument the earning power of Bethlehem was obstructed in this integration period now completed. Net per share of common 301 STUDIES IN SECURITIES stock was $6.46 (on average outstanding) in 1923, $2.56 (while steel prices dropped $10 a ton and operations touched 319% rate) in 1924, $5.30 in 1925, and $7.48 in 1926. These earnings and the prospects now support an expectation of early dividend resump- tion. Fact that a balance has been earned for the common every year since 1909 is a sidelight on Bethlehem management. Capital structure of Bethlehem Steel comprises $207,906,000 funded debt (reduced $29,200,000 net since January 1, 1925 with saving of $1,800,000 interest charge per annum) equal to $27.30 per ton of ingot capacity, $97,000,000 7% cumulative preferred stock (simplified from three issues in 1922) or $12.70 a ton, and $180,000,000 common stock or $23.70 a ton. Capital ahead of the common is $23 a ton less than beginning 1922. Comparatively with U. S. Steel, under this rule-of-thumb Bethle- hem, rated at a third the Corporation’s capacity, has only $1 more bonds and preferred stock and $1.30 more common stock per ton, and the bare bones of ingot capacity are filled out with finishing capacity now something like as well; in Eastern and Pacific markets the Sparrow’s Point, Baltimore, and South Beth- lehem plants have a decided freight rate advantage. At the present level (50) the Bethlehem Steel common stock equity Is priced not materially above the lowest (37) in a decade, not- withstanding that $164 per share applicable assets seem nearer a dividend yield with greater earning ability for speculation. Chicago & North Western Ry. The map speaks better for Chicago & North Western Ry. than do the earning statements for recent years. Of mileage 70% lies in Wisconsin, Iowa, Illinois, Michigan, and Minnesota, and 45% honeycombs the two first named, all intensively producing land which is neither sparsely settled nor over-railroaded and therefore unlike the real Northwest as it is now or the Southwest as it was. Operation of the railroad has yielded common dividends without a break from 1878; at 7% 1902 to 1920, and from 1880 except in 1895 never less than 5% until 1923, the total payment for which year was 4%, the current rate, just keeping the bonds ‘‘legal’’ in- vestments. The high prestige formerly attaching to the common stock is seen in the record of a lowest price of 11814 in fifteen pre- war years and a quotation above 130 as late as 1916. Adversity dragged the shares down in 1923, 1924 and again in 1925 to a market value less than half of par. 311 JAS. H. OLIPHANT & CO. Under conservative guidance Chicago & North Western Ry. in twenty years ending 1917 earned $244,000,000, paid $171,000,000 preferred and common dividends, and sold at par over $106,- 000,000 common stock, accounting for a strong capital structure which an addition of $125,573,000 to funded debt since 1917 has not at all seriously impaired. Present capitalization is $327,524. - 000 funded debt, $22,395,000 7% participating preferred stock, and $156.743.000 common stock. This excellent property seemed to lose heart in the post-war stress, earning for the common stock nothing in 1921, 5% in 1922, 4.9% in 1923, and 4.2% in 1924. Early in 1925 some important changes in management were made with perhaps initial effect in 6.3% earnings in 1925 and 6.9% in 1926. Common stock on which earnings applied last year included $11,- 587,000 issued in exchange for Chicago, St. Paul, Minneapolis & Omaha Ry. stock of which the remaining minority may be all acquired by issuing $3,673,000 additional. Since 1883 North Western had owned 50% or $14,920,000 of ‘‘Omaha’’ stocks and, with the remainder secured, a merger is due to follow. An imme- diate reason is to accomplish the refunding of $40,000,000 Omaha 5% and 6% bonds in 1930 under the cloak of North Western credit. This coming North Western system would compare well in many respects with the model Chicago, Burlington & Quincy, as follows, 1926 figures expressed per mile: Siock ....r- Funded Debt ..... Operating Revenues Operating Expenses . Miles, first main track . . 2A, Miles, additional track ... 1.346 N. W Svstem ~&iv L410 ~817 01-4 C.,.B. &Q. $18,167 22,298 “7,154 2,384 "404 1.097 The difference in operating costs is one susceptible to correction. Combined earnings in recent years would have varied little from actual results for North Western common, but up to 1917 the Omaha regularly earned above $2,000,000 comparative with barely $800,000 in the two years past, and in time the advantage should prove important. Itself in turn North Western appears destined for linking with Union Pacific. The traffic interchange of the two is suggestively out of proportion to the 3% stock interest Union Pacific has held for years. Intrinsic value about $190 for Chicago & North Western Ry. com- mon shares as indicated by Government valuation at minimum 1914 unit costs, shows the market price to be low still, provided carning power is to be re-established. Expenses were 78.1% of 1321 STUDIES IN SECURITIES revenues in 1926, 77.8% in 1925, and 80.7% in 1924; 19% shrink- age means $1 more common share earnings, regardless of possible benefit from rate readjustments. The 7% preferred stock is an unique investment, with the privilege of receiving 3% additional after 7% on the common and equal share after 10%, under which from 1902 to 1920 a total 89% was paid annually. In the common stock. investment and speculation are nicely combined. Columbia Gas & Electric Corporation After a quarter century of separate development the properties of Ohio Fuel Corp. (itself a 1924 merger) were consolidated No- vember 1 last with those of Columbia Gas & Electric Co. and the new Corporation took the latter name. Advantages to Columbia are evident herein: for the new company versus the old company, the requirement for rentals, bond interest, preferred dividends, and $5 on the common shares is increased 1.8 times, comparative with increases 2.7 times in gross and 2.1 times in net earnings and 3.4 times in acreage of lands representing the principal earning asset. To accomplish this, Columbia Gas in effect added only $210,000 to fixed charges and increased preferred stock from $23,860,000 7% to $95,185,000 6% and common stock from 1,500,000 to 3,000,000 no-par shares (since increased by issue of 375,000 shares at 60), thereby improving an already strong cap- ital structure. Since rentals, interest, and preferred dividends take only 429, of current earnings it is clear this public utility is held on ample margin by common stockholders. Revenues aggregating $92,120,000 in 1926 came mostly from retail distribution of natural gas to 4,400,000 population in Ohio and adjacent states and electricity to about 1,100,000 in Cincinnati, Dayton, and vicinity, with wholesale of both not inconsiderable. Of the 4,860,000 acres of land held 760,000 or less than 169% are operated for natural gas and less than 71,000 or 114% for oil. Accordingly, future gas supply is assured from the vast land reserve, potentialities of which are known, while oil and natural gasoline production from a minor status can be expanded almost at will. Altogether this system property stands on the books at 439 mil- lions, as the actual figure accrued during some 25 years, against which 121 millions reserve is accumulated. Charges to reserve, chiefly depletion of gas, run $2.70 per common share annually, and taxes equal $2.50; both are so heavy that relief would seem possible. After all charges the 1926 earnings rate was $6.90 a share on Columbia Gas common stock while on official statement 1331 JAS. H. OLIPHANT & CO. the rate structure is not fully adequate and economies from the Ohio Fuel consolidation are not yet reflected. Seasoning of the old Columbia Gas & Electric common stock was thorough as to earnings and dividends as well as marketwise and with the late expansion made on sound basis the new shares paying $5 dividend at 95 price level offer participation in a growing enterprise upon fair terms. Consolidated Gas Co. of New York A substantial change in capital structure for Consolidated Gas Co. of New York and a final ruling of vital gas rate litigation both have now been accomplished. The Supreme Court decision in November last was a complete victory for the company and Consolidated Gas Co. and public utilities generally have now the protection of legal principles established by Supreme Court decision which gives oreater assurance to capital invested therein than ever before, Capitalization after recent financing consists of $200,395,000 funded debt, $969,000 minority stocks of affiliated companies (now under one-half of 1% of their total), $120,000,000 5% preferred stock, and 4,320,000 shares of no par common stock. The 1926 financing brought $146,000,000 new money net (after retirement of old preferred) which wiped out $59,500,000 bank loans and left $86,500,000 to replenish treasury and provide 1927 capital expenditures. In five years, $280,508,000 has been expended on plant account (41% of present total) providing for the expansion and modern- ization of the gas and electric facilities making up the world’s largest electric property (the wholly owned New York Edison Co.) as well as the largest gas utility. Much of this of course has not yet reached its fully productive stage (1926 figure was $88.559,000 and 1925 $57,365,000). Earnings record on the company’s stock as at the time outstanding has been as follows (including amounts impounded pending set- tlement of gas rate litigation) : 1926.....%.8.30.70 1804. nie vn 88.80 1925... 8.12 1923.......... 99% 1g39 Wk. SQ on ei Current $5 dividend rate has been in effect since 1922 when it was increased from 79% on the old $100 par stock or $3.50 equivalent. I'he final settlement of rate litigation and recent financing are steps toward a $6 dividend. [34] STUDIES IN SECURITIES The natural growth of the city and the more rapidly expanding Westchester territory together with the various new gas and elec- tricity consuming devices afford the speculative promise of steadily increasing gross and net. The gas-fired refrigerator is now de- veloped and a sliding scale method of rates is engaging study with view to encouraging use of gas for heating purposes. Refrigeration, washing machines, and numerous household appliances hold prom- ise for electric power consumption. Of sound capital structure, serving a territory of splendid possi- bilities, Consolidated Gas Co. of New York represents perhaps the premier gas and electric public utility and its stock has exceptional investment merit. Corn Products Refining Co. Pea pr capls From organization in 1906 until 1915, Corn Products Refining Co. earned an aggregate surplus for the common stock of $10,- 876,000, a 10-year average of $1,000,000. In the six years 1916-21, net for common dividends was $47,250,000, an average of $7,875,- 000 a year, including $11,630,000 (record earnings) in 1919 and $10,720,000 in 1920. The war quickened the progress of the company and brought it and its products to a position which doubtless would not other- wise have been attained for many years longer. Thus, earnings appear stabilized on a higher plane, balance available for Corn Products common being $8,679,000 in 1922, $8,734,000 in 1923, $9,149,000 in 1924, $5,813,000 in 1925, and $10,184,000 in 1926. Out of $58,000,000 total surplus for common stock 1906-21 only $6,720,000 was distributed in common dividends (initial divi- dend at 4% rate paid January, 1920), leaving over $51,000,000 undivided profits, of which $15,000,000 was used to retire bonds {less than $2,400,000 now outstanding) and preferred stock ($25,000,000 remains outstanding) and balance went to increase working capital and investments and to round out plant. Out of $42,557,000 surplus for common 1922-26, $26,640,000 cash divi- dends were paid, and $12,500,000 was capitalized by stock dividend in 19924 Representing no tangible assets at organization, Corn Products Refining Co. common stock mow ($63,250,000 outstanding, par $25) has approximately $32 per share book value, the soundness of which is indicated by writing out of surplus $16,000,000 good will, patents, ete. in 1923, following $20,000,000 in 1922 ‘in read- Justment of values of plants and intangible assets.’’ [35] JAS. H. OLIPHANT & CO. ay Plants are at Edgewater, N. J., Argo and Pekin, Ill., and Kansas City, with foreign units in England, France, Germany and Can- ada. The products (mostly packaged) enjoy established trade names such as Karo corn syrup, Argo and the newer Linit brand corn starch, and Mazola corn oil. Commercial production of refined cerelose to compete with cane sugar has been successfully developed. Treasury position ending 1926 was excellent with $52,959,000 current assets, including $36,114,000 cash, loans and marketable securities, compared with $5,835.000 current liabilities. On 2,530,000 $25-par common shares the earnings of Corn Products were per share as follows: 1928... $4.03 1924......... 33.62 1925. . 2.30 1923. ccviineie 3.45 1922. ...33.43 Ability to cover the $2 dividend rate in 1925 despite an extra- ordinary squeeze between high corn and low sugar prices showed fundamental strength. Its announced policy brought $1 extra to Corn Products in 1926 in addition to regular $2 and continuance of extras seems likely. The character of its business makes for steady growth, and its rich treas- ury position permits relatively large proportion of surplus to be paid in dividends. Detroit Edison Co. Half in stock and half in bonds, beginning 1927 as it was in 1913 and again in 1917, the capitalization of Detroit Edison Co. is de- signed to withstand trouble, but like much insurance this probably will never be needed. During twenty-four years of operation, the company has paid dividends regularly in the eighteen to date, 8% beginning 1916 after 7% from 1911, and in only one year were dividends paid though not earned. The single exception was 1920, when abnormal fuel costs reduced earnings to half of dividend re- quirements, while the quick granting of rate relief demonstrated the company’s good public relations. In step with the Detroit district which it serves exclusively the Edison Co. has expanded business rapidly and continuously sought new capital. Number of household customers exceeded 100,000 in October, 1915, 200,000 in November, 1919, 300,000 in November, 1923, and 400,000 in July, 1926. Of 500,000 customers all told 400,000 are concentrated in the metropolitan area although 4,000 1361 STUDIES IN SECURITIES RE a ie] jis square miles, 19 cities, and 162 smaller communities make up the whole territory. Around 40% of revenue is from sale of electricity for power, so that 24-hour use of the plants is greater than with most companies, and is assisted by the increasing daytime residence consumption shown in averages of 415 k. w. in 1920, 460 in 1923, and 519 in 1926. Comparing 1926 and 1921, the gross revenues were $44,855,000 and $23,383,000, the funded debt was $86,337,- 000 and $64,299,000, and the stock outstanding was $86,543,000 and $28,013,000 in the respective years. The present stock in- cludes $32,269,800 exchanged at par for convertible debentures sold in 1923 and earlier. In 1926 $15,000,000 5% junior mortgage bonds were offered to the public on 4.90% basis, and in 1927 $20,- 000,000 more at 4.85%, indicating Detroit Edison’s high credit rating. Upon the $172,880,000 capitalization beginning 1927, the annual interest requirements were $4,531,000 and the dividends at 8% are $6,923,000, the total being 6.6% on bonds and stock together, or well within the accepted fair return on public service property. Earnings for the stock were as follows: 11.3% a7 1.0 1923...: 1922... 4% 1921... Varying reserves are made from earnings against plant deprecia- tion; the unused balance in the fund was $2,848,000 in 1921 and $14,079,000 in 1926; in three years 1924-26 $13,515,000 was ap- propriated from earnings and $2,043,000 from surplus to the re- serve, and it would according to official statement be adequate for the next few years without additions. The immediate advantage to stockholders of the policy of financing by partner subscription is the receipt of valuable rights. Offerings of new stock were in 25% ratio in 1923 and 1924 and 10% in 1925 and 1926, and in the last two years the subscription right was worth $3 to $4, or a sizeable bonus with the cash dividend. Detroit Edison stock is a sound investment affording a good income return. Erie R. R. Only four railroads run all the way from New York to Chicago and of these only Erie R. R. does not pay dividends. By tradition the Erie capitalization of $200,000 per mile of road is extravagant, but an estimate of $700,000 a mile was recently placed on record as the current cost for construction of a vital trans-Pennsylvania segment to make up a proposed fifth trunk line. Apart from pres- 1371 JAS. H. OLIPHANT & CO. ent earnings the simple occupancy of the field here has great potential value. Outstanding securities of the Erie, $248,400,000 funded debt, $36,- 000,000 guaranteed leased line obligations, $47,904,000 first and $16,000,000 second 4% non-cumulative preferred, and $119,103,000 common stock, represent not only a 2,317-mile roadway over 60% double-tracked, reaching Buffalo, Cleveland, Youngstown, Akron, Cincinnati, and Indianapolis, besides Chicago, with terminals in- cluding eight main-track access to New York waterfront, and the equipment, but also wholly owned anthracite coal properties. Receipts from these coal subsidiaries in the last ten years alone were $58,500,000, including $48,000,000 from Pennsylvania Coal Co. compared with $41,306,000 earnings after depletion allowance, and would have paid Erie preferred dividends and left $2.95 a share yearly for the common stock. All surplus income, however, since 1907 when a preferred dividend was last paid, has been de- voted to the property. In the twenty years, the mileage of second track was increased from 803 to 1,363 and of side tracks from 1,628 to 2,061, rail in main line was increased from 86 to 99 pound aver- age, locomotive power by 45% and freight car capacity by over 25%, and grades improved, allowing the exceptional 4,500,000 tons freight density to be handled now with more economy. Aggregate $120,477,000 surplus income in twenty-five and one-half years means about $100 a share put behind Erie common. Comparative with a previous high record of $5.05 a share in 1916, the earnings for the common have been as follows, with the in- cluded contribution of coal subsidiaries shown likewise, per share: 1926. . 1025... 1924. 19922 Net per Share raq9 iL "6 710 From Coal $4.80 2.36 6.04 5.16 bis SE Presumably before the right expires October 1 this year all $19,- 627,000 4% convertible bonds will have been exchanged at 50 for common stock and on the $151,736,000 then to be outstanding the 1926 earnings would have been $5.50 a share. Another $13 - 547,000 of 4% bonds, remainder of $34,000,000 issued in 1901 for purchase of Pennsylvania Coal Co., will all be retired by 1935 through sinking fund. Recent financing with $50,000,000 Refund- ing & Improvement Mortgage 5% bonds, two thirds to replace other debt, represents a milestone for Erie, since this blanket junior lien created in 1916 is used for the first time and an ability to borrow on reasonable terms is demonstrated. Maturities prior to 1950 now are but $32.730.000 and finally the floating debt is gone. 1381 STUDIES IN SECURITIES I nT aC Te Pe 2 es ee Ce gore Flat oi a At 79% Erie’s operating expense ratio presents opportunity for savings; a 5% reduction would add $4 to common share earnings. Forecast of Erie earnings, worked out in the interest of Chesa- peake & Ohio Ry., expects on the common stock as probably to be increased better than $6.60 share earnings in 1927, $8.10 in 1928, $9.40 in 1929, $10.60 in 1930, and $12.00 in 1931, assuming $5,304,- 000 annual coal subsidiary dividends or $3.50 a share equivalent. Controlling stock in Erie is now held in favor of ultimate grouping with others as in the attempted Nickel Plate merger but an ex- change of shares or lease is unlikely for the time being. Resemblance of the present Erie R. R. to the Southern Ry. of a few years ago is surely not remote. Plenty of traffic, prospect of carrying it more cheaply, ability to raise new capital for better- ments, current earnings sufficient for preferred dividend payments, make Erie stocks attractive for speculation. General Electric Co. To an enviable record in fifteen years before, General Electric Co. added a remarkable showing in the war and the immediately post- war period, and in the past four years, 1923-26 of prosperity, made new records in earning power, From 1910-15 earnings ranged from 11.10% to 16.25% and the lowest figure since 1902 was 7.40% in 1908. Cash rate of 8% in dividends was maintained, supplemented by a 809% distribution in stock in 1912. Billings expanded from $90,467,000 in 1914 to $275,758,000 in 1920 and inventories from $29,292,000 to $118,109,000, successfully fi- nanced by a $37,000,000 increase in stock, $23,000,000 increase in funded debt, and $45,000,000 bank borrowings. Similar flexibility was shown in contraction in 1921 when billings decreased 20%, bank loans were paid off, and 13% earned on the stock. War profits and prudent financing resulted in $63,000,000 cash and (fovernment securities at the end of that severe year. Thus the way was prepared for full participation in the prosperity of the past four vears. viz: 1926. . 1925. . 1924. . 1923. 1922 Billings $326,974,000 290,290,000 299,252,000 271,310,000 200.194.000 *Figured on basis of present no par changed for $100 par value in May, 1926. {391 Net Income $46,672,000 38,641,000 39,236,000 33,525,000 26.231.000 *Surplus per Share $6.14 5.12 5.28 4.60 3.79 shares of which four were ex- JAS. H. OLIPHANT & CO. Dividend payments, in addition to 8% cash rate, were 4% an- nually in common stock beginning 1917 and through 1921, 5% annually in 6% special stock of $10 par value 1922 to 1925, one share of Electric Bond & Share Securities stock in 1924, and in 1926 a $3 cash rate and $1 in special stock on the split-up stock. Its premier position in its field, its record of large earning power over the years, its rich treasury position and conservative valua- tions form the basis for the $4 cash rate established in May this year and the extra payment of $1 in cash instead of the payment in special stock, total $5 being equal to 30% dividends on the old stock. With 25,000,000 square feet of factory space in sixteen apparatus and supply factories and twelve incandescent lamp factories, seven service shops and 104 distributors in this country, doing over $300,000,000 gross business, General Electric plants are carried at perhaps one-third their reproduction cost. Since formation in 1892, $260,326,000 has been spent on plants, $68,231,000 dismantled, leaving cost of present plants $192,095,000. Against this gross figure reserves of $141,538,000 have been set up, so that net value of plant account is $50,557,000. This figure at end of 1926 doing $327,000,000 of business compares with $67,000,000 in 1921 doing $221,000,000 business. This accounts for the low $40 book value of General Electric shares. At the end of 1926 current liabilities were $35,537,000 and current assets $290,046,000 including $147,536,000 cash and U. S. Govern- ment securities. Investments in associated companies are carried at appraised valuation of $71,472,000, representing manufacturers of special- ties, distributors here and abroad, and departments of the busi- ness incorporated for convenience or efficiency. Capitalization consists of $2,047,000 315% debentures due 1942, $1,200,000 remaining Government loans due 1928, $42,929,000 6% special stock par value $10 (issued as dividend, with probability of retirement at $11 a share) and 7,211,482 shares of no par common stock. Title of ‘‘most promising infant industry’’ might well be applied for by the electrical equipment companies. ‘‘Bread and butter’’ business of this group consists of production of lamps, motors, ap- pliances, ete. and will continue so; and here we have an official cal- culation that less than 30% of American houses are yet ‘‘wired’’ and only 6% equipped with modern household devices. Widest scope lies with the development now begun of central station super-power systems, with the bringing of electrical ma- [401] STUDIES IN SECURITIES chinery to the farms for cost reduction, and with the electrifica- tion of railroads, supplemented by radio, electrical refrigeration, and talking movies, in which General Electric is already inter- ested. Extensive projects of railroad electrification are under consideration, with only 29% of Class 1 mileage of American roads yet electrified. Power generation, we are told, will more than double in the next decade. Only 214% of farms enjoy elec- tric power. Past record, present condition, and future prospect combine to place General Electric stock in a secure position among indus- trial stock issues of real investment character. General Motors Corporation The present General Motors Corp. may be said to date from 1922 when after the losses of the deflation period the management was changed and new clearly defined policies inaugurated. Fullest advantage was taken of the following five years of general pros- perity and the accomplishments provided the commercial sensation of the country, viz: 1926 1921 Net sales...........$1,058,153,000 $304,487,000 Net earnings ....... 186,231,000 def. 38,681,000 Working capital.... 192,006,000 96,542,000 Cars sold . 1,235,000 215,000 Always a leader in this 26-year-old industry, General Motors is the largest automobile manufacturer in the world (now making one car in every three produced in the United States and Canada) and, even more, paid out in dividends on its common stock in 1926 the largest total in the history of industrial enterprise. Of the surplus available for the common stock the following per- centages were paid out in common dividends: in 1926, 62%, in 1925, 63%, in 1924, 66%, in 1923, 45%, and in 1922, 23%, notwith- standing which there was reinvested $179.744.000 in the property in these years from surplus. We find at the end of 1926 the plant account carried net (after depreciation) at $310,482,000 or $99,416,000 more than at the end of 1921, whereas the plants in 1926 turned out almost six times as many cars as in 1921. The great Fisher Body plants have been acquired, the Pontiac and La Salle cars added to the line, and Frigidaire (the electrical refrigerator) has been developed (1926 increase in investment therein amounting to $19,000,000), to men- tion only the outstanding developments. The conservatism of the plant account is obvious. This point must be considered in con- nection with the $55 tangible asset value of the common stock. [411 he JAS. H. OLIPHANT & CO. Nt y General Motors’ capitalization consists of $134,916,000 of preferred and debenture stocks (including $25,000,000 sold in February of this year) and 8,700,000 shares of common stock. As of March 31, 1927 current assets totaled $364,924,000 (including $111,257,000 cash and marketable securities) and current liabilities were $134,- 032,000. In 1926, including equities in undistributed subsidiary profits, the surplus for the common stock at present outstanding was $21.80 a share, against $14 a share in 1925 calculated on a comparable basis. In the first half of 1927 net was $124,842,000 (increase of $27,- 550,000 over the 1926 period) which was equal to $14.35 a share on the common. The large expansion and acquisitions make com- parison of previous years futile. Disregarding undistributed subsidiary profits the past five year record has been as follows: Net Sales 1926......$1,058,153,000 1925...... 734,593,000 1924...... 568,007,000 1923... .. 698,039,000 1622 4.68 707.000 Earned on Common $168,440,000 98,845,000 38,058,000 55,180,000 45.067.000 Carried to Surplus $64,509,000 36,910,000 13,028,000 30,408,000 24 .290.000 General Motors’ success has of course come primarily from domestic sales of passenger cars. Its fortunes will for some time vary with the conditions affecting this business. It is interesting, however, to consider the phases of its activities which hold promise over coming years of providing offsets to any adversity in this main department. In 1926, $19,000,000, and in 1925, $6,000,000 was added to the in- vestment in Frigidaire, whose market possibilities General Motors officials believe largely parallel those of the motor car. Last year’s volume doubled that of 1925 and substantial increase in capacity is available this year. Frigidaire now is the third largest con- tributor to General Motors business, ranking next to Chevrolet and Buick units. Detailed figures are not available but enough is known to indicate the extraordinary possibilities of this subsidiary. Overseas sales provide a second activity which may increasingly supplement domestic business. The record of this department for the past five years is interesting: Number of Units 118,791 100,894 64,845 45,000 21.872 1926... ci ve B88 es vir ve 1924... ......... iit caiman 1099 Ss [ 49 STUDIES IN SECURITIES In 1925-6 foreign sales were just under 10% of total sales whereas in 1922-3 the ratio was under 59%. The Ethyl Gasoline Corp. is owned equally by General Motors Corp. and the Standard Oil Co. of New Jersey. Substantial economies are claimed for this fuel and after some unfortunate inei- dents in development it is now proven entirely safe for public use. It is officially stated this unit will come into earning power in 1927 and that within a year Ethyl gasoline will be available through this country and Canada and in many foreign countries. The last and probably of smallest possibilities is the investment in the Yellow Truck & Coach Manufacturing Co. carried on the books at $24,091,000, which to date has been unsatisfactory. General Motors provides for the investment character of its stock the qualifications of dominance in its field, excellent management, strong capital structure and treasury position, and subsidiary activ- ities of potential size which may offset the rather volatile nature of its industry. Great Northern Ry. In aggregate and per share of stock the Great Northern Ry. earned more in 1926 than any road in the northwestern territory had in ten years. The 10.4% share net was last exceeded with 11.1% in the twelve-month to June 30, 1916. It is not enough, however, to approximate the old figures, for Great Northern be- gan 1927 with $106,000,000 more property investment than ten years previous, and this must contribute earnings before the com- pany becomes as well off as formerly. Six percent on that amount would have meant over 2.5% more earnings for the stock. The vitality of this railroad is suggested by the record of unin- terrupted dividend payment for thirty-six years including nearly twenty-four at 7% rate and no less by the progress made lately under handicaps. Between 1917 and 1927 surplus after dividends amounted to $44,000,000 while increase in funded debt (exelud- ing $7,387,000 added in refunding the ‘‘Burlington’’ stock pur- chase bonds which continue self-supporting with $250,000 present annual margin) was $55,280,000 and these two sums were applied to improvements involving 149% addition to locomotive power, 35% increase in 90-pound or heavier rail, and 100% installation of automatic signals on the St. Paul-Seattle main line. When freight traffic in 1921 and 1922 fell 30% and 16% below 1916- 1917 volume, the earnings for Great Northern stock were 3.5% 1431 JAS. H. OLIPHANT & CO. _—— (without the extra Burlington dividend equal to 5.4%) and 4.4%, with result in 1922 the reduction from 7% to 5% in dividend rate, though earnings in 1923 and 1924 were 7.2% and in 1925 had re- covered to 8.6%. Moderate additions have brought funded debt to $333,395,000 (in- cluding $115,000,000 non-callable 7s due 1936 representing 499% Burlington ownership) while stock is $248,985,000 (preferred in name only since right to issue common was surrendered in 1898) or 43% of capitalization. With that proportion of stock a few dollars per share over the dividend means a generous addition to surplus and in fact 11.7% (1912-13) was largest net in twenty years. When a dollar was a dollar in the years 1898 to 1915 $188,480,000 Greati Northern stock was subscribed at 100 by stockholders. The Government valuation indicates $185 share asset valuation, plus $80 if adjusted to present-day dollar pur- chasing power, the $60,000,000 excess market over book value of Burlington holdings offsetting entirely the unproductive $45,800,- 000 Spokane, Portland & Seattle Ry. half interest. The 8,200-mile Great Northern system lies 25% in Minnesota, 23% in North Dakota, 22% in Montana, and 14% in Washington. A dependence on wheat and ore promises to be gradually overcome by farming diversification and industrial development in these States. Products of mines (mostly ore) and of agriculture (mostly grain) represented in 1926 609% and 15% respectively of ton- nage but 22% and 27% of revenues (in 1925, 58% and 17% versus 22% and 28%; in 1924, 56% and 219% versus 21% and 33%) so the importance of ore to earnings should not be over-rated. Bulky freight allows low operating ratio, and reduction from 79% in 1921 successively to 77%, 72%, 68%, 66%, and 64% in 1926 aims toward the ‘‘test period’’ 57%, which would add 38% to earnings on the stock. Providing the unification with Northern Pacific Ry. as proposed on equal terms is consummated, Great Northern will share its somewhat better current earnings in exchange for an equity in the valuable lands owned by its twin railroad, while both will divide an estimated $10,000,000 annual savings, equal to 2% on the stock, from simplified operation of a 27.000-mile svstem. In the fall from eminence, Great Northern Ry. stock last sold at 100 in 1919, but the approach to parity again is with the trend clearly reversed, and the price range of 10714, to 18934 in ten years to 1916 comes to mind naturally. An attractive return even from the present dividend is available with good investment back- oround. [441 STUDIES IN SECURITIES Tlinois Central R. R. 5 Eats With the Governor of Illinois ex-officio a member of the directorate, the Illinois Central R. R. in the careful character of a semi-public institution has held financial success and the confidence of stock- holders. The common stock has stood in the investment class for generations while others have come in and dropped out. After- math of the war did not bring down the price as low as 80; and in the years 1901 to 1912 the range was between 184 in 1906 and 120 in 1912, although the dividend was 7%, same as now. Payment of dividends has been uninterrupted since 1860, averag- ing 6.84% during these sixty-seven years. Long sustained earn- ing capacity goes without saying. For ten years ending 1917 net earnings were $8,740,000 average or just 8% on $109,000,000 com- mon stock, and less than 6% was earned in only one year of the decade, 1911-12 with 3%. Coming through the Government opera- tion years 1918 to 1920 with $13,000,000 added to surplus after dividends and sinking fund requirements, Illinois Central showed the following earnings on the common : 1926. 300 2A 08 10 L028. eens 0.328 A022. vei 143 1924 . | gh 1921... 28 Between 1921 and 1927 funded debt was increased from $264,963,- 000 to $367,208,000 but, thanks to sale at par of $34,145,000 69% preferred stock convertible into common and $11,005,000 common stock, the proportion of stock has slightly improved from 29% to 30% of total capital. Ending 1926 there were outstanding $367,- 208,000 funded debt, $25,268,000 preferred stock ($8,881,000 hav- ing been converted) and $129,181,000 common stock. A good part of proceeds from stock financing were devoted to terminal im- provement in Chicago and electrification of suburban lines and so will not bring immediate return. Upon completion of electri- fication work in 1926, however, the company found that stim- ulus to residential development and traffic was already consider- able. In 1908 Illinois Central had sold $13,898,000 and in 1901 and 1902 $35,040,000 common stock at par and at the earlier date used the funds for double-tracking the line from Chicago to New Orleans. So long as the Mississippi Valley continues fertile, Illinois Central is likely to prosper, while there are expansion possibilities in the arm that runs through Iowa to the South Dakota and Nebraska borders, and currently over $1 a share for Illinois Central stock Hos untaken in the earnings of the fully owned Central of Georgia y. [45] JAS. H. OLIPHANT & CO. A return of nearly 514% afforded by Illinois Central stock at the present price level can compete for desirability with many bond yields in particular since the only reasonable question is when the dividend will be raised. oie International Harvester Co. The 1926 year marked complete restoration to International Har- vester Co. of its former, old-line, peacetime status. Between 1909 and 1916 with sales from $100,000,000 to $132,000, - 000 this company earned 914-1714% on its stock, manufacturing and selling in the United States and foreign countries a complete line of agricultural machinery and implements, binder twine, en- gines, wagons and motor vehicles. Then came an irregular seven year period. First were faced losses of $47,500,000 for war de- struction of foreign business and later the unprecedented shrink- age in the American farmer’s purchasing power which really con- tinued until about 1923. Fortunately in the period of foreign losses domestic business was excellent, and oddly enough when the American farmer was stricken the foreign business picked up. The 1923 year was the first in three that domestic business showed a profit and it was small. From that time the recuperation has been rapid, aided by recent development of motor truck, bus and tractor, so that the total earnings per common share were: 1928... ors. 318070 105... 411.80 1925, <i 736.30 192%, Sn 8.10 The dividend record tells the same story. From a regular cash basis of 7% (with 1214% stock extra in 1920) it was found necessary to drop the cash rate in 1921 to 5% supplementing this with 4% in stock. The latter was suspended in 1923 and the cash rate of 5% continued alone until April, 1926 when current cash rate of 6% was restored. In December last the extra stock dividend of 49% per annum was resumed likewise. International Harvester’s capitalization consists of $65,568,400 7% preferred and $105,949,000 (July, 1927) common stock, or total capital issues of $171,517,400. Current assets as of December 381, 1926 totaled $203,852,000 (including $25,004,000 cash) and cur- rent liabilities were $34,449,000, providing a net working capital of $169,402,000. Harvester is one of the few companies with work- ing capital alone equal in amount to its capitalization. Book value of International Harvester common stock is $170 a share, dis- regarding liberal reserves which equal nearly $30 a share more. 146] STUDIES IN SECURITIES om i The company’s net in 1926 equaled 9% on invested capital com- pared with 8% in 1925 which was the same as averaged in the company’s first ten years 1902-12. Biggest gain domestically in late years has been in the truck, coach, and tractor lines. Sales in foreign fields last year were record, with Canadian, French, German and Swedish plants operating at capacity. In this coun- try there are now 136 company-owned branches and motor truck service stations, an important factor in the future growth of the company’s motor vehicle business. Success of the company led to attack under anti-trust laws. Fifteen years later in 1927 a final decision of the Supreme Court left In- ternational Harvester with clean escutcheon. Assuming the annual 4% stock dividend turned into cash and added to the $6 payment from the company, the total income re- turn at a price as high as 180 would exceed 7%, and if 50 points less should be realized for dividend stock it would still be over 6%, an attractive rate considering the fundamental points of strength in this investment. International Telephone & Telegraph Corporation Rate at which International Telephone & Telegraph Corp. has been going ahead is exhibited by the increase in stock from $17,500,000 beginning 1925 to $130,000,000 following 1927 changes. Latter figure includes $36,040,000 offered for the entire stock of All America Cables, Inc, $20,000,000 issuable in converting $25,000,000 bonds, and $14,500,000 subscribed this year at 100 by stockholders. Also it includes approximately $9,000,000 subscribed at 83 in 1925 and $30,000,000 at 100 in 1925 and 1926 and used with proceeds from $25,000,000 514% bonds for telephone development abroad and for purchase of the foreign business of Western Electric Co. in 1925 for $28,000,000 outright. With a foothold in South America secured through control of the cables, and an advantage everywhere but the United States and Canada held through manufacture of equipment under exclusive Bell patents, International Telephone has made itself the opportuni- ties to follow up. Payment for All America Cables is four shares for every three, but on the total stock exchangeable the earnings averaged 10% or $3,624,000 over the past seven years, and this property, with 32,000 miles of cable serving in triplicate the principal Latin American nations, paid at least 6% dividends for forty years, 1471 JAS. H. OLIPHANT & CO. despite more than doubling the shares during the last twenty years by stock distributions. Cost of $28,000,000 cash for the Western Electric business, conducted now under name of Inter- national Standard Electric, compared with $3,012,000 average four-year earnings obtained from $26,000,000 to $40,000,000 vol- ume of sales. Accordingly these acquisitions both appear good value. To the operated telephone systems with which the com- pany began in 1920, of Cuba and Porto Rico, now each 98% owned, International Telephone added at a moderate outlay 80% ownership of the lines in Spain in 1924 and 92% of those in Mexico in 1925. Beginning 1927 the number of ’phones served was 63,834 in Cuba, 12,533 in Porto Rico, 20,485 in Mexico, and 114,360 in Spain, and against over 1,500,000 in New York City alone the figures emphasize possibilities for expansion. During 1927 control of the telephones in Chile and Montevideo, Uruguay, was acquired. Ability of International Telephone management to improve earn- ings per share regardless of additional stock issuance stands out strongly. Record has been as follows: on average amounts of stock outstanding, $16 in 1926 and $13 in 1925, on shares at close of the years, $11.20 in 1924, $8.40 in 1923, $7.30 in 1922, and $6.50 in 1921. Since organization in 1920 a $6 dividend rate has been regularly paid and four subseription rights in three years have given additional cash value. Capitalization, $35,000,000 415% bonds of the parent company, $8,889,000 bonds and $8,165,000 preferred stock of subsidiaries, 48,799,000 subsidiary equities, and the $130,000,000 International Telephone stock, surely is on sound lines, and under highest bank- ing sponsorship this company looks forward confidently. Priced to return less than 5%, the stock displays a warrantable expecta- tion of increased dividends. Louisville & Nashville R. R. Bought ‘like a box of candy’ from a speculator (John W. Gates) in 1902 for $50,000,000, the 51% of Louisville & Nashville R. R. stock then so casually acquired for Atlantic Coast Line R. R. has returned over $56,000,000 in cash dividends in the twenty-four years since (excluding dividends on 61,200 shares subscribed at par in 1912). Indirect return from traffic interchange has doubtless been much greater. Benefit has been mutual, and Louisville & Nashville, originally unrelated geographically to Atlantic Coast Line, owes much of its prosperity to development as an integral part of the Coast Line system. 143] STUDIES IN SECURITIES I : dl A large part of Louisville surplus earnings has been regularly put back into the property, over 49% in the past decade, notwithstand- ing payment of at least 5% and an average over 6% dividends since 1900. Assets, mostly road and equipment, have been increased approximately $300,000,000 during the period of Atlantic Coast Line control, and $121,900,000 dividends paid, while increase in capitalization was but $158,000,000 aside from $45,000,000 stock dividend distributed in 1923 to capitalize in part $82,000,000 ac- cumulated surplus. Beginning 1927 surplus had grown up to $74,- 336,000 comparative with $117,000,000 capital stock and $235,- 542,000 funded debt. Almost unique among railroads Louisville & Nashville charges depreciation on physical property other than equipment and last December 31 had $14,644,000 reserved which other companies would consider surplus. The 5034 miles operated by Louisville & Nashville together with 2705 of “‘dependencies’’ form a gathering net of lines in Kentucky, Tennessee, and Alabama, running to terminal outlets at Chicago, Cincinnati, St. Louis, Memphis, Mobile, and New Orleans, and con- necting with Atlantic Coast Line at four eastern points. A prin- cipal subsidiary is the 71.8%-owned Nashville, Chattanooga & St. Louis Ry., operating 1259 miles, dividends from which at 7 % for the past decade are equal to 69 cents on Louisville shares with 85 and 86 cents equivalent left untaken in the last two years. On the present 1,170,000 shares in Louisville & Nashville R.R. the earnings have been as follows : 1926. .. wee . $16.60 1028 ie 311.55 1925. -.. 16.00 1922. cvueeen.. 9.05 1924 ves 12.10 LODE. ew 00 [Ears Deficit, ETE i Best record before 1925 was $14.05 equivalent on the present basis in 1917, and average was short of $8 during ten years 1908 to 1917, so a new level of earnings seems established. Assurance of this is found in operating expense ratios above 76% in 1925 and 1926, and accordingly high for a road with heavy coal traffic; under present gross revenues 49% lower ratio means $5 more share earnings, and in 1916 expenses took less than 65% of gross. Uninterrupted dividend payments by Louisville & Nashville since 1899 rose to 7% rate in 1910 and remained there except for 59 and 6% dividends in 1915 and 1916 until the 6215 % stock distribu- tion in 1923. On the increased capital dividends were begun at 5% and increased to 6% a year later. In August, 1926, 145% extra was Paid and 7% rate was made regular with the February, 1927, semi- [491 JAS. H. OLIPHANT & CO. annual dividend. This is equal to 1184% upon the former capital. Lines of Louisville & Nashville during nearly seventy years have grown as arteries to the heart of the ‘‘Industrial South’’ with ample capacity to handle the activity developing. Of 4891 miles in main track in 1926 there were 1020 of 100-pound and 2090 of 90- pound rail. Condition and record of the property stamp both bonds and stock as investments. Missouri Pacific R. R. The product of Missouri Pacific R. R. was 5995 million freight tons moved one mile in 1922, 7416 in 1923, 8773 in 1924, 9564 in 1925, and 10132 in 1926. New management since early 1923 and accel- erating business activity in the region served both have been work- ing to the company’s advantage. A progressive economy in operation shows the company to be on the right track. Taking the customary tests of efficiency, there was improvement over the year preceding in each month of 1925 and 1926 and in four months of 1927 reported, in ton miles per train hour with one exception, in car miles per car day with two excep- tions, and in fuel used per thousand ton miles with two exceptions. Meanwhile an aggressive financial direction had acquired at last report 62% control of Texas & ‘Pacific Ry., and 88% of New Or- leans, Texas & Mexico Ry. and its fully owned subsidiary Interna- tional-Great Northern R. R., and also had bought a half share in Denver & Rio Grande Western R. R. Purpose was to safeguard and supplement the 7347 miles of Missouri Pacific lines spreading fanwise southwestward from St. Louis, for the 4040 mileage of subsidiaries covers Texas and brings Missouri Pacific to New Or- leans and Mexican gateways, while the 2560-mile ‘‘Denver’’ line leads to the Pacific coast. Ultimate merger of subsidiaries is logi- cal, with the Denver in which the other half interest is owned by Western Pacific R. R. Corp. to continue an investment paying divi- dends for a whole only in traffic benefits. Holdings of Texas & Pa- cific common stock were increased in 1926 from 100,000 to 150.000 shares. Twenty years ago the Missouri Pacific property last paid a divi- dend and ten years ago it came out of receivership. Government rental years then brought $11,100,000 surplus income, but there- after the addition to surplus was nil, until in 1924 $6,503,000 was earned, in 1925 $7,648,000, and in 1926 $8,632,000. In summary the present company has had $40,800,000 net income and has in- creased funded debt $75,300,000, mostly accounting for $98,000,000 {501 (Fw STUDIES IN SECURITIES added to road and equipment and $32,000,000 to investments. Cap- ital structure now is $326,542,000 funded debt, of which $65,000,- 000 at 4% and $43,000,000 at 5% matures 1929 to 1933, $71,800,- 000 5% preferred stock, carrying 45% dividend accrual July 1 this year, and $82,840,000 common stock. Earnings of Missouri Pacific on its shares, figuring the balance for the common with only regular preferred dividend requirement deducted, have been as follows: 1926 1925 1924 Preferred .........»..312.00 $10.60 $9.10 ITO. ee oe os DSTO 4.90 3.50 Including the due proportions of surplus income of subsidiaries, the ‘Denver’ being excluded, these earnings become as follows : 1926 1925 1924 Preferred ......:..... 314.95 $13.50 $12.60 COMMON 0. ives 5.05 7.40 6.60 Were the preferred dividend arrears of $32,310,000 funded at 6%, the common share earnings would be reduced $2.35, but a liquida- tion of the accrual other than by cash payment seems unlikely. With gross revenues of Missouri Pacific above $130,000,000 annu- ally and of the system $200,000,000, a reduction of 1% in operating expense ratio adds $1.60 to direct common share earnings and $2.40 on a system basis. Actually the ratio was 76.8% in 1926, 18.2% in 1925, and 79.6% in 1924, for Missouri Pacifie proper, comparative with 68% in 1917, and for the system 76.0% in 1926 and 76.8% in 1925. Maintenance has been high relatively. Refunding of debt early in 1927, not only by sale of $95,000,000 5% bonds at par showed the good standing of Missouri Pacific as a road not yet in the dividend class, but also coupled with a lesser piece of refinancing late in 1926 brought about $800,000 or $1 a share annual interest savings. Weighing the probabilities it may be concluded that earning capac- ity even from present traffic is subject to further increase, while current results seem to justify dividends, and the stocks, preferred being convertible into common at par, are worth holding for specu- lation. Montgomery Ward & Co. For each of its 1,141,251 common shares Montgomery Ward & Co. does approximately $160 annual business and the $4 dividend now paid is 214% of it. In addition 1% of sales is taken for fixed $7 dividends on 205,000 shares of class A stock and for interest [51] JAS. H. OLIPHANT & CO. paid indirectly on $8,600,000 mortgages of subsidiary warehouse companies. Any reasonable profit margin covers this total eapi- tal levy with ample to spare. Concern of the management, since taking hold in the fiftieth year of this oldest mail order house to deal with the effects of $17,743,000 losses in 1920-21, was primarily to expand sales. The business increased as follows : 1926 1925 1924 1923 1922 .$183,801,000 170,593,000 150,045,000 123,702,000 84.739.000 It was made known in 1926 that effort would be directed rather to improvement of net earnings thenceforth. Five years’ aggregate sales were $712,879,000 and net earnings shown after taxes were $41,163,000 or 5.8% of the gross. After paying dividends, including in 1925 the last of $4,754,000 pre- ferred and class A accumulations, there remained $29,772,000 for development of the company. New plants were opened at Oak- land in 1924, and Baltimore (cost $2,000,000) in 1925, and additions made at Fort Worth in 1924, Kansas City (capacity in- creased 25%) and St. Paul in 1925, and Baltimore (new plant en- larged 40%) and Oakland (cost $550,000) in 1926. Despite the outlay on property, no bank loans were shown at December 31, 1922 to 1926 inclusive, and $24,000,000 was added since 1921 to working capital. Resort to financing was only when in 1926 $5,750,000 5% bonds were sold for subsidiary account. With the treasury replenished from the proceeds and with $1,224,000 sinking fund the $4,250,000 7% preferred stock issue was retired at 115 at the year- end. The finish of rehabilitation work was signified by beginning common dividends at $4 rate in November last. Record of earnings for the common stock is $2.05 a share in 1922, $4.40 in 1923, $6.20 in 1924, $8.05 in 1925, and $6.25 in 1926. These results were after $500,000, equal to 44 cents per common share, appropriations to sinking fund and surplus in years before 1926, and about $245,000, equal to 21 cents per common share, pay- ment of preferred dividends in every year, both of which charges are now eliminated. Thus real earnings of Montgomery Ward were nearly $2.25 a share less in 1926 than in 1925, attributed officially to declining commodity prices, greater proportion of small-profit merchandise sales, and special expenses of opening the Baltimore plant and of increasing catalogue circulation. Unofficially, the automobile tire sales, perhaps $30,000,000 in amount, are believed to have at best contributed nothing to net, although the strain of [562] 7% 7 - Ee 50% shrinkage in rubber values at least proved the worth ef budget = control of inventory. Merchandising a widely varied list\o®goods, 3 ordered from an annual distribution of 40,000,000 large aRd small \ ® J catalogues to over 8,000,000 customers paying cash in adva e 95 of 100 transactions, and turning over the inventory now some seven times a year, the company is intrenched against ordinary troubles. STUDIES IN SECURITIES Montgomery Ward & Co. common stock offers attractive return with a well-protected $4 dividend, plus the promise of an extra payment in a good year. It is an equity suitable for investment holding. National Biscuit Co. Co-incident with splitting the stock seven-for-one in December, 1922, and tripling the common dividend disbursement, National Biscuit Co. began reporting earnings double the steady rate shown for twenty-four years. Net of $11,025,000 was reported for 1922 (in which year a 75% stock dividend was paid, par reduced from $100 to $25, and the cash dividend rate increased from 7% to 129%) and this earning capacity was substantiated by a steadily increasing net income to $14,674,000 in 1926. The contrast with preceding years was extreme. From organiza- tion in 1898 (as a merger of going concerns) to 1910, the net income as disclosed ranged narrowly between $3,292,000 in 1898 and $4,101,000 in 1907; and from 1911 to 1921 between $4,130,000 in 1915 and $5.677.000 in 1921. Suddenness of the jump in 1922 probably is explicable not by un- usual expansion of business (for National Biscuit has grown grad- ually and, incidentally, without borrowing a dollar) but by ac- counting income more clearly to reveal earning power. Ultra- conservatism has always marked National Biscuit bookkeeping. Besides charging extensive plant alteration direct to operating ex- pense, the company liberally wrote off outlays for new construe- tion and property acquisition. Gross business is not reported reg- ularly, but we know that in 1909 $42,700,000 sales were handled with plant carried at $53,000,000, while in 1922 sales were at a $97,000,000 annual rate with plant valued at only $62,000,000. The company now operates 43 plants with close to 200 selling branches or agencies so that 90% of the business is done by owned equipment delivering to customers’ stores. Inventory turnover averages two weeks and receivables represent only about a week’s collection. Except for a newly developing output of bread and [53] JAS. H. OLIPHANT & CO. cake, the company is engaged in manufacture of over 400 varieties of biscuit, mostly packaged and under trade names. Capitalization consists of $24,804,500 7% preferred stock (in the first rank of industrial preferred issues) and 2,046,520 shares of common stock, $25 par value. There is no bonded debt. Current assets December 31, 1926 were $32,525,000 (including $21,117,000 cash and marketable securities) and current liabilities $5,465,000. Plants were carried at $73,700,000. Book value of the common was $34 a share. Earnings were reported in 1926 of $6.32 a share on the common stock, in 1925 $5.78, in 1924 $5.45 and 1923 $5.05. The wide con- sumption of the company’s products as staple foods, continuity of demand together with fortnightly turnover of inventory and rich treasury position provide splendid buttresses for crises of depres- sion or price inflation. A 13% increase in net in the first half of 1927, with $3.52 per share earned, indicates widening margin above current $5 dividend basis. Excellent management caps the qualifications of National Biscuit stocks to investment rating in their respective classes. New York Central R. R. Instead of the small part now received as dividends, almost the whole earnings of three important subsidiaries will be taken into income by New York Central R. R., if the leases proposed last year are executed. For the common stocks of the three roads, Michigan Central R. R., Cleveland, Cincinnati, Chicago & St. Louis (the ‘‘Big Four’’) Ry., and Cincinnati Northern R. R., the earnings combined were $30,800,000 in 1926 and $30,700,000 in 1925 as compared with $10,150,000 and $8,040,000 dividend pay- ments. Thanks to ownership of these stocks at least 99.29, 91.3% and 97.7% respectively, the full $20,000,000-0dd surplus earnings can be collected by paying less than $500,000 annual cunaranteed dividends to minorities. By itself, the New York Central reported earnings per share $14.50 in 1926 and $12.70 in 1925 on $3883,258,000 stock, including $87,937,000 mostly issued in 1925 at 105 in bond conversion, $12.90 in 1924 on $304,837,000 stock, including $24,902,000 sold at par to stockholders, $16.70 in 1923 and $7.70 in 1922 on approximately $268,000,000 stock, including $18,640,000 exchanged for $21,186,- 000 Big Four stocks, and $6.70 a share in 1921 on the $249,597,000 stock outstanding sinee the 1914 formation of the present com- [54 1 STUDIES IN SECURITIES pany. Adding the equities in undistributed earnings of the roads to be leased, the results would become per share: 1928. . ke... 519.70 102%... 320.70 1025... = 18.15 1907 seen 112105 LOS. a 0.75 a SE a These figures do not include the equities in 50% control of Pitts- burgh & Lake Erie R. R., 25% or more interest in Reading Co., or in considerable other property not promising much greater earn- ings contribution soon. Giving effect to leases proposed, the New York Central will be responsible for approximately $1,150,000,000 publicly held obliga- tions having a fixed charge on earnings, and $421,584,000 stock as increased by 109% subscription in 1927 becomes 27% of capital on this basis. The company proper has improved the ratio from 25% in 1920 to nearly 389% in 1927 and has remaining some $62,000,000 stock authorized for sale on occasion to replace ma- turing debt. Excluding equipment notes the maturities of New York Central, Big Four, and Michigan Central are $73,834,000 prior to 1930 and $128,356,000 in the next five years. An anchor to windward is the maturity between 1990 and 2361 of a total $502,359,000 bonds averaging only 4.018% interest rate. Under a policy of substantial financing from earnings the four lines in 1926 paid the public only 35% of the amount available for common dividends and retained $49,528,000 surplus and in the six years paid 429% and had left over $218,000,000 or $57 a share if applied to New York Central stock. Dividend record of New York Central R. R. and the predecessor company has been uninterrupted since 1870. In 1923 the 5% rate was raised to 7% and in 1927 to 8%, with which new dividend the mid-1927 offering of 10% new stock was facilitated. The shares of New York Central R. R. represent a tenth of the entire railroad business and a service indispensable to eight states with half of the country’s population producing a quarter of farm crops, half of mine products, and two-thirds of all manufactures. Under the cir- cumstances the stock at 150 level is by no means over-valued. New York, New Haven & Hartford R. R. The surplus after charges for New York, New Haven & Hartford R. R. in 1926 was $8,243,000 compared with $7,418,000 in 1925, $2,999,000 in 1924, deficit of $2,917,000 in 1923, of $4,911,000 in 1922 and $15,327,000 in 1921, the first year of private control after the period of Governmental operation and guaranty. Thanks [55] JAS. H. OLIPHANT & CO. to progressive improvement in earnings and co-operative financing of a critical maturity ‘New Haven’’ was successful in avoiding the path which after a similar start in 1921 ‘“St. Paul’’ was forced to follow. New Haven in 1921 following the loss sustained had work- ing capital of $1,287,000, and a $27,582,000 maturity four months away ; in 1926 had earnings equal to $5.20 a share, working capital of $19,950,000, and no sizeable maturity until 1940, barring $87,- 130,000 6% Government loans. Sale of $50,000,000 7% preferred stock at 100 in 1927 is a step in working off the Government borrowings and it proves both a better credit standing and stock- holder good will. This recovery was made with practically no contribution from the ill-fated outside investments which were responsible for the com- pany’s fall from eminence beginning 1913. Rehabilitation of earn- ing power has been due to a tightening grip on expenses, operating ratio declining from 102.3% in 1920 to 73.7% in 1926 (pre-war ratio closer to 70%). No net return is being received from $146,000,000 face value of bonds, notes and stocks of subsidiary railroads, trolley lines and steamship companies, whereas the capital obligations outstanding as a result of their acquisition is a fixed charge. A gross income in dividends from this total was received of $160,060 in 1926 (from Central New England Ry.) but $973,700 was paid out in guar- antees on New York, Westchester: & Boston Ry. bonds and Boston R. R. Holding Co. preferred shares. It is in the ultimate increase of earning power of this bulk of unproductive commitments that final rehabilitation of New Haven rests. The biggest item in these outside ventures is the ownership of 219,189 shares of Boston & Maine R. R. common stock (plus 10,694 shares of preferred stocks and 45,317 shares of prior prefer- ence stock, latter to be taken up at various dates under the 1926 readjustment plan) carried on the New Haven books at $27,247,000 as of December 31 last (through its medium the Boston R. R. Holding Co.) which was acquired at high prices in the latter part of New Haven’s extravagant expansion period 1903-14. Boston & Maine has had a remarkable recovery of earning power from a deficit of $7,348,000 in 1921 to a surplus in 1925 of $6.90 a share, and in 1926 of $9.40. From the low prices there has been a $12. - 000,000 appreciation in the Boston & Maine investment. This is substantial though still leaving book value over twice market value. Some of the street railway ventures look hopeless, other invest- ments such as Connecticut Co. ($45,569,000 book value) and New York, Westchester & Boston ($14,430,000 book value) while now [561 STUDIES IN SECURITIES [ worth far below the excessive figures on the New Haven books, have possibilities. New York, Ontario & Western (book value $13,108,000) is paying a small occasional return, 1% in January this vear. The steamship companies are less a problem. Ending 1926 New Haven showed a $9,294,000 deficit to corporate surplus, but partly due to merger of Central New England Ry. the books in 1927 were made to balance. Road and equipment account admittedly is stated at ficures under real valuation. New Haven is not near dividends but a margin of safety over fixed charges has been re-established, a sound treasury position has been restored, critical financing has been accomplished, opera- ting efficiency obtains again, and the salvage value from a bulk of extravagantly made outside investments will be larger than seemed likely a few years ago; and it is in these factors that New Haven’s attractiveness as a low-priced non-dividend railroad spec- ulation is found. Norfolk & Western Ry. Specialization in the haul of soft coal rewards the Norfolk & West- ern Ry. with an earning capacity in 1926 more than two and a half times the 10% dividends paid. Coal traffic of the company exceeds 75% of the total and in twenty years has developed from six to forty million tons. Behind this are the cheaply mineable deposits estimated at 500 years’ supply in the West Virginia dis- trict wherein the Norfolk & Western taps the Pocahontas, Tug River, Thacker, and other fields. There are the smokeless high- volatile Pocahontas coal, which being uniquely fit for bunkering goes mostly to Hampton Roads for export, and the ordinary gas coal, which normally moves rather toward the Great Lakes and has a great future with Western industry. The 2241 miles of Nor- folk & Western lines deliver to tidewater and to the Pennsylvania R. R. System north at Hagerstown and west at Columbus and (Yneinnati. Average 287-mile freight haul, which is surpassed only on half a dozen railroads, and heavy trainloads make for a low ratio of operating expense to revenue, as follows: 1926. .........59.20% 1995. . eros ss 048 024... TRO ibe? mEq ae 1998,0us ss vn TSG 08L eB 1917 oneness 028 007 Rad (571 JAS. H. OLIPHANT & CO. On present gross revenues 5% difference in operating ratio means over 4% on the stock. Earnings for Norfolk & Western common were : 1928... on.80 1925... “R7 1924. . : 1923. 1999. cna. 0, 1921, 78 1917. 15.0 1916. . img yor fs ® = od Dividends were paid beginning 1901 every year, and 7% from 1916 to 1925 with 1% extra in each year excepting the abnormal years 1918 to 1921 inclusive, with result the rate was considered 8% in effect. An extra 3% was paid from 1926 earnings and in 1927 the regular rate was advanced to 8%. Judging by past prac tice extras will be continued, Procedure in financing by Norfolk & Western shows the property to be built on solid rock. At present the capitalization is $120,068, - 000 funded debt, $22,992,000 4% preferred stock, and $139,570,000 common stock. Of the common stock $73,700,000 or more than half has been issued during twenty years in conversion of bonds for which over $74,000,000 cash was paid; about $1,150,000 bonds re- main to be converted. Taking the ten years since 1916, the com- pany has added exceeding $156,000,000 to the property, and aec- cumulated $26,930,000 or $20 a share in short term investment se- curities to employ surplus cash, represented by 92 millions increase in surplus and 27 millions increase in depreciation reserve, both being from earnings, and by 52 millions addition to outstanding stock and bonds. Between June 30, 1916 and December 31, 1926, this meant raising the proportion of 100-pound and heavier rail from 19% to 54% of all tracks, adding 129% to track mileage, and enlarging locomotive power 289% and freight car capacity 16%. For evidence of a strong equipment position, the annual net re- ceipts from rental averaged $2,420,000 1921-1926 or 1.7% on Nor- folk & Western common stock. Effect of the stock interest in Norfolk & Western held through a quarter century by Pennsylvania R. R. has been growth of the two together with seeming destiny of Norfolk a system membership under lease. Terms were discussed in 1924 but agreement not reached ; meantime stockholdings were increased from 36% to over 43% by Pennsylvania. Admittedly the disturbances to customary coal trade in America and Britain have favored Norfolk & Western Ry. but allowing liberally therefor the earning power should support more than the present regular dividend. Negotiations again for lease would pre- sumably recognize the 10% paid last year. On its own, Norfolk & Western common stock has investment rating, while speculation is afforded in the lease possibility. [581 STUDIES IN SECURITIES Northern Pacific Ry. Evidently, upon a 1926 showing of the best results from company operation since 1917, Northern Pacific Ry. with 1925 ended eight years of difficulties though never deficits. By reducing the divi- dend after nearly eighteen years at 7% to 5% in 1922 the com- pany was able to keep on adding to surplus each year. As against a total $24,800,000 dividend curtailment, 29% annually for five years, a total $81,650,000 was expended on the property since 1917 which can be accounted for as follows: (1) $35,742, 000 surplus income including $9,980,000 Government help 1918- 1920 and $12,451,000 special dividend from the jointly-owned “Burlington’’ in 1921, (2) $12,554,000 receipts from land sale, and (3) $32,127,000 added through operating expenses to equip- ment depreciation fund. Actually there was $817,500 decrease in funded debt apart from issuance of $8,384,000 additional bonds in 1921 to refund the Burlington stock purchase debt which sup- ports itself with $1,448,000 annually over. From these figures obviously the road was not only fully pre- served but further improved in the years of blight and the earn- ings now to compare with pre-war must include a return upon the $80,000,000 interim property additions. The company reported earnings return on railway property investment 6.4% in 1916 and 5.8% in 1917 but below 4% since 1918 and 3.5% average 1922-1926. Thanks to the invested surplus, however, the earnings on Northern Pacific stock, compared with 10.9% in 1916 and 11.9% (including Burlington extra dividend equal to 2.2%) in 1017, were 8.9% (including Burlington extra equal to 5%) in 1921, 6.1% in 1922, 5.2% in 1923, 6.4% in 1924, 7.2% in 1925, and 8.5% in 1926. Up to 1917 for eleven years the net averaged 9% with the least 7.6% in 1914-15. With capitalization $319,481,000 bonds and $248,000,000 or 44% stock a small margin in earnings percentage over dividend rate represents a conservative saving for surplus. Integrity of the $187,852,000 surplus, giving $175 book value for the stock, is checked by Government valuation of physical prop- erty, and this is with $83,017,900 Burlington stock carried at 119 paying 10% and earning 14%. Thriftily, the Northern Pacific has still conserved the possessions of its subsidiary Northwestern Improvement Co., taking in divi- dends only a small part of accumulating earnings from coal, ore, and lumber activities. Liands owned by the railroad in 1926 were 5,582,000 acres valued at about $1.50 per acre and around 15% 1591 JAS. H. OLIPHANT & CO. tillable; in every year since 1919 contract cancellations have re- turned more acreage to the company than sold, but with the storm. over settlers are reappearing in the country. Unification with Great Northern Ry., now proposed, is the reason- able outcome of joint ownership of Burlington which neither would give up. Savings calculated to result from common opera- tion of exceeding 27,000 miles of road are $10,000,000 or $2 on Northern Pacific shares. In addition an equity of $1 to $1.50 per share in Burlington earnings micht be taken. All ready for a renewal of empire-building the Northern Pacific Ry. since 1917 has equipped the 3,000-mile main line from Twin Cities to Pacific Coast with automatic signals for efficient opera- tion, adopted 100-pound rail as standard, and added 7% to loco- motive power. The 1926 earnings reaffirm the investment value of the stock, and the eventual correction of rate inadequacies together with a gradual recovery in farming, mining, and lum- ber promise eventually the 7% dividend and a price of par for the stock again. Pennsylvania R. R. Prestige of Pennsylvania R. R. was bred in the payment of divi- dends every year since 1847 and found refreshment last November when the rate was raised from $3 to $3.50 or to 7% on the $50 par shares. Just as a reduction to a $2 rate lasting from May, 1921 to November, 1922 displayed the adverse conditions then encountered, So the recent increase means the way is clear again, for excepting Six quarters at 7% between 1900 and 1921 $3 or 6% was the regu- lar distribution. Steadily if slowly the proportion of revenues taken by operating expenses has been brought under control and accordingly the net for dividends has been expanded, viz. : Share Earnings Operating Ratio 26.20 71.5% £25 78.4 ~ 80 80.2 50 81.9 25 82.6 30 86.1 Reducing the expense ratio two points with revenues exceeding $700,000,000 a year adds $1.40 to share earnings. Equity in Pennsylvania R. R. is different than it was ten or more years ago. The same amount of $499,266,000 stock had the residue [601 STUDIES IN SECURITIES of $709,817,000 gross revenues in 1926 and $230,278,000 in 1916. Mileage was 10,527 compared with 4,536. This results from leasing of all important system members except Long Island R. R. and West Jersey & Seashore R. R., and in addition to interest on its own $608,688,000 funded debt Pennsylvania pays a fixed charge of about $28,390,000 upon some $355,000,000 leased line securities actually outstanding, so that the stock has become 34% of a total true capitalization. Doubtless the sale of stock again, it having last been offered in 1913, will increase the proportion of equity capital. Comparing 1926 with 1916, the whole Pennsylvania system, includ- ing Long Island and West Jersey & Seashore, had revenues in- crease 73.7%, rates per freight ton mile 63%, and expenses includ- ing rents and taxes 92.6% with wages 84.5% more. Partly to care for 5.5% gain in freight ton miles there was added 7.4% to freight car capacity and 27.49% to locomotive power, an increase of $576,620,000 in gross property account comparing with $297 - 567,000 in funded debt. Government valuation taken variously as of 1915 to 1918 for system roads indicated without depreciation allowance $1,166,171,000 excess value over par for Pennsylvania stock, and company surplus earnings in nine years 1918 to 1926 were $137,135,000 additional, suggesting about $1,800,000,000 total equity or $180 a share intrinsic value. Representing 10% of all the railroad investment and business, Pennsylvania R. R. must travel along with the United States and the stock should continue or improve a remarkable investment record. Peoples Gas Light & Coke Co. Last year was the sixth in the new chapter of Peoples Gas Light & Coke Co. history, which opened in 1921 after four disastrous years due to war costs without rate relief. From 1897 to 1916 this company, from gas sales mostly for household cooking and illumination, paid annual dividends ranging from 5% to 8%, and from 1909 to 1916 its stock never sold under par. Then came the war cost period, dividends were suspended in 1917 not to be re- sumed until 1922, and the stock ranged from 32 to 64 for four years. Earnings in past six years have been as follows: 1020.3... 0. YL09, 025. a. 11.8 LOO oi 125.0 vn 109 ope... li ok Wat. ol aye bl JAS. H. OLIPHANT & CO. This meant dividend restoration at 5% rate in 1922, stepped up to 6% in 1923, 7% in 1924, and 8% in 1925 since continued. Thus profit and loss surplus increased to $21,073,000 December 31, 1926 from $10,718,000 December 31. 1920. Peoples (tas Light & Coke Co. serves the City of Chicago (under Insull management) with gas under perpetual charter and with- out competition. In 1926 of 36,687 million cubic feet of gas sold (a record) 1214% was for industrial purposes, a development which has contributed substantially to the company’s rehabilitation. In 1925 more gas-fired central heating plants were installed in households (supplanting coal furnace) than the sum total in years thereto, and in 1926 house heating gas sales increased 70% over 1925. Steady increase in refrigeration and in incineration of household wastes by gas is reported. The gas industry has united in promotional, educational effort. Through its own plants, those of the Chicago By-Products Coke Co. (built in 1921 and operated wholly for Peoples Gas on a sliding scale price contract), and gas purchased from other sources, Peo- ples Gas is equipped to furnish about twice the 1926 output. Con- tract with the By-Products Coke Co. runs to 1946 by which date Peoples Gas engages to purchase or merge the physical assets of the former. Capitalization of Peoples (tas consists of $46,177,000 funded debt (after maturity March 1 this year of $5,750,000 secured 6s), $25,- 196,000 guaranteed bonds (interest on $19,196,000 of which have not become a charge against Peoples Gas), and $46,274,000 (ex- clusive of $311,200 subseribed but unpaid) $100-par capital stock. In 1925 $3,850,000 and in 1926 $4,235,000 capital stock was sold at par. As result, working capital as of December 31 last at $6,929,000 was the best in years. Peoples Gas stock seems soundly returned to investment character (refund suit now on appeal before Illinois Supreme Court might cost company $2,500,000) and its 8% dividend has protection of good management, improved capital structure and treasury posi- tion, and restored earning power. Pullman Co. Now in the sixtieth year of its corporate existence, the Pullman Co., serving about 80% of American railroad mileage with Pull- man cars and representing the second largest car manufacturer in the country, has no bonds, no floating debt, and $135.000,000 1621 STUDIES IN SECURITIES capital stock, consisting of 1,350,000 $100 par shares, soon to be supplanted by 8,375,000 shares to be exchanged 214 for one of present stock. This company has an enviable dividend record: Current 8% rate has prevailed since 1900, 614% was paid in 1899, and from 8% to 12% per annum from 1874 to 1898. Stock dividends were paid of 20% in 1910, 36% in 1906, and 50% in 1898, 20% extra in cash also being distributed in the latter year. Over the years stability of earning power has been a feature. Only in 1921 and 1922 has Pullman Co. failed to earn its dividend (fiscal year ends July 31), those years reflecting the general depression, the aftermath of Government control, and the inevitable higher costs. Earnings on the stock in recent years have been as follows: July 31 July 31 1026, nn L520 1923. 0. vee» 10.30, T9280. i. ALT 1992. ou iveaiie Bal EO24 oo i116 192%. eae Bad The above earnings include only dividends paid to Pullman by the manufacturing subsidiary. The equity in the undistributed profits of the latter was equal to 2.80% on Pullman stock in 1926 and the same amount in 1925. The Manufacturing Corporation’s $50,000,000 capital stock is car- ried on Pullman’s books at $36,780,000, whereas according to its own balance sheet it has a sound asset value of $56,807,000. Its current liabilities as of December 31, 1925 (latest available) were $4,857,000 and its current assets $39,495,000 including $22,351,000 cash and marketable securities. Pullman Co. itself in 1926 had $22,070,000 current liabilities and $48,247,000 current assets including $33,151,000 cash and market- able securities. This makes the treasury position of the two com- panies impregnable. Taking the value of the Manufacturing Corporation stock at $56,- 807,000 (its own book value, well justified by average earnings 1925-26 of $6,822,000), Pullman Co. stock shows an asset value of $139. on conservative basis. The 8739 cars and equipment are carried at $108,293,000 after depreciation of $12,400 per unit, whereas 546 cars added in 1926 averaged $33,600 apiece. In something over six years since Fed- eral control, $81,473,600 has been invested in new equipment so a substantial part of the total is relatively new. Experience indi- i631 JAS. H. OLIPHANT & CO. cates a twenty-year life and thus rate of 5% is used for deprecia- tion. With restored earning power after a single lapse 1921-22 (entirely abnormal), cash holdings admittedly larger than needed in conduct of its business, prudent capitalization, good management, and chal- lenged only by such standards as Illinois Central R. R. and Penn- sylvania R. R. for its dividend record, the Pullman Co. as half public utility and half industrial has justified a position for its stock among equities of real investment character whether in old form or mew split-up shares. Reading Co. eer Without selling bonds or stocks to pay for added facilities, the Reading Co. handled 31,230,000 tons of freight in 1900 and 70,- 758,000 in 1926, and total operating revenues were $20,683,000 in 1896, $39,658,000 in 1906, $57,298,000 in 1916, and $99,290,000 in 1926, a record suggestive of the value meanwhile put behind the common shares. Steadily, an increasing traffic in merchandise and bituminous coal has cut down the proportion of anthracite to total, from 38% in 1900 to 19% in 1926 although actually hard coal tonnage in- creased 9%, and Reading now enjoys ‘‘well-balanced rations.”’ Aside from a small equipment note issue during war control years, and the refunding of $18,811,000 bonds in 1911, the last financing amounted to $27,731,000 in 1901, annual charge $1,109,000, for purchase of $14,504,000 stock of Central R. R. of New Jersey, present annual dividend receipts $1,740,000, book value $23,713, 000, market value over $44,000,000, intrinsic value over $70,000, 000 estimated. This 53% stock control of Jersey Central gives Reading entry to New York harbor terminals with five miles of water frontage mostly unused yet, and also lines in Pennsylvania as supplemented by its own representing the very heart of eastern rail merger ambitions. For years 43% of Reading stock was owned in nearly equal share by New York Central and Baltimore & Ohio and new purchases begun in 1925 result at present in at least 509% control. Segregation of the anthracite and iron properties in 1923 meant to Reading Co. the receipt of $27,100,000 cash, the release from liability for $31,542,000 4% bonds and from sinking fund re- quirements on $62,724,000 others, the increase from 4% to 414% interest on the latter, and the loss of dividend income, none ever [641 STUDIES IN SECURITIES from the Coal Co. and occasionally but not since 1919 about $1,000,000 annually from the Iron Co., so earnings gained on balance. Disclosure of earnings, upon the change of Reading to a simple railroad operating company, indeterminate before then, showed net per share of common stock $14 in 1923, $8.80 in 1924, $10.20 in the anthracite strike year 1925, and $11.20 in 1926. Noticeably, the proportion of revenues taken by expenses still is high, 72.5% in 1923, 76.3% in 1924, 75% in 1925 and 74% in 1926, compara- tive with less than 709% in the last decade, and 2% reduction would bring $1.50 more share earnings to the common stock. Included in expenses were depreciation and retirement reserves for equip- ment of $6,444,000 in 1926 and $5,913,000 in 1925; effect of these was to increase the balance in reserves $8,400,000 in two years or by $6 per common share; perhaps a consequently im- proved equipment will not continue to call for reserves at this rate. Maintenance also in the past two years has included laying 300 miles with 130-pound rail. The property is represented by $121,900,000 bonds, $140,000,000 stock, and $99,030,000 surplus. Of the bonds $41,242,000 bear 4% and $61,362,000 414% interest, while of the stock $70,000,000 is 49, preferred, allowing a moderate return earned on property value to bulk large on the common stock. Book value is $121 for the 1,400,000 $50-par common shares and roughly $150 giving effect to property value admitted by the Government and mar- ket value of Jersey Central stockholdings. Common dividends began with $1.75 in 1905, increased to $2 in 1906, $3 rate in 1910, and to $4 in 1913. Declaration of $1 extra last December likely was the forerunner of a well-justified increase in the regular divi- dend. Reading common is an equity whose full measure the mar- ket is beginning to take. Reynolds Tobacco Co. For some years the R. J. Reynolds Tobacco Co. has led competitors in earnings reported ; its ‘‘Camel’’ brand has been the largest sell- ing cigarette and is reputed to take nearly half the entire demand (total cigarette consumption has increased 85% since 1920) ; in ad- dition the company has the popular ‘‘Prince Albert’’ pipe tobacco and other brands including chewing tobaccos. Expansion in earnings available for dividends after maximum allowed reserves for taxes and depreciation has been as follows: [651 JAS. H. OLIPHANT & CO. Year Net Year Net 1926........$26,249,000 1923........$23,040,000 1925........ 25,222,000 1922........ 21,992,000 1894 . 23.778.000 1521... 9s. 16,253.000 ay icy 1 This record compares with an annual average of $9,518,000 from 1916 to 1920 and of $2,682,000 in the five years following 1911 when the dissolution of the tobacco trust put Reynolds on its own. This addition of $20,000,000-odd to earning power was accom- plished with re-investment of $110,583,000 surplus earnings in 15 years and less than $8,500,000 net outside capital retained in the business. Latter item is result from (1) sale of $2,475,000 common stock in 1912 and $10,000,000 in 1918, (2) sale of $20,- 000,000 7% preferred stock between 1914 and 1920 and redemption of it at $24,000,000 (120) in 1925, and (3) sale in 1919 and re- tirement in 1921 of $15,000,000 6% notes. Sole capital liability is now $100,000,000 common stock, $25 par value, consisting of $10,000,000 voting and $90,000,000 non-voting “B”’ stock. This includes a 25% stock dividend paid in February this vear. Expansion through profits has been liberally capitalized with stock dividend distributions. Thus $40,000,000 stock issued as dividend in 1920 cut surplus to $2,064,000 and $20,000,000 paid in 1922 left $4,915,000 surplus. Surplus as of December 31, 1926 was $50,204,000 of which $20,000,000 was subsequently distributed marking down surplus to about $30,000,000 which is still larger than at the end of any vear except 1925 and 1926. Beginning 1926, simultaneously with preferred stock retirement, the cash dividend on Reynolds common stock was increased from $3 (129% on $25 par) to $4 and again July 1 to a $5 rate. This is continued on the stock enlarged by recent 25% stock dividend just as a $3 dividend was maintained in 1922 despite a 33 1/3% inerease in stock. Protection for the $5 rate is found in the record of $8.20 a share earned in 1926, $7.44 in 1925, $6.99 in 1924, $6.76 in 1923 and $5.96 in 1922. These are computed on amounts of common out- standing each year and through 1925 were after deduction of pre- ferred stock dividends equal to about 44 cents a common share. As of December 31, 1926 current liabilities were $12,610,000 and current assets $128,526,000 including $16,931,000 cash. It is offie- ially stated taxes have been paid over the years or provided for in maximum amounts and pending tax adjustments should mean sub- stantial increase in company’s surplus account. reel ra STUDIES IN SECURITIES The record of the R. J. Reynolds Tobacco Co. entitles its man- agement to first rating (entire executive personnel is constantly at the factory in Winston-Salem, N. C.) and its stock is among the industrial issues of real investment merit. Southern Pacific Co. oan Alone among the railroads the Southern Pacific Co. has let its dividend rate stand twenty years without change. Approximately half the earnings have been reinvested. The property still needs finishing touches doubtless, but this year several major improve- ments are complete including some first undertaken a generation aco, and the earnings are due to benefit. A record business for Southern Pacific system in 1926 was well handled, for revenues increased $3,699,000 and train movement cost decreased $5,715,000, and though maintenance was $2,643,000 more the operating net showed $5,753,000 gain. Expenses re- mained above 72% of gross, however, and have ranged from 72% to 749% for five years. The neighboring Atchison system reduced its operating ratio from above 72% in 1923 and 1924 to 69% in 1925 and 65% in 1926. Southern Pacific and Atchison appropriate about the same part of receipts for maintenance but if Southern Pacific had had similar transportation cost its earnings in 1925 and 1926 would have been $4.70 and $3.70 per share greater than in actuality. To take up some of this earnings discrepancy the work of last vear need only be continued. Applicable to Southern Pacific stock the earnings have been excep- tionally stable if not large. Since the $6 dividend was begun never has less than $7 been earned. With 629 expense ratio in 1917 an $18 share net was shown. Results in the past six years were as follows « 1026. ove svns. 310.40 1025........... 0.60 1924 . i 22 a0 1923.4 een. 512.90 1929... 0... 9.50 162%: 2.90 ok For the last three years, the company has disclosed the income of solely controlled affiliated companies, averaging an additional 98 cents a share annually. Assets of these are greatly potential, such as 9,705,000 acres of lands including 3,297,000 unpledged and un- valued on the books, 29,000 acres of coal land, 20,500 acres of oil land with 4,000,000 barrels present production, and the 1,400-mile line adventuring down the fertile west coast of Mexico and just now operating in full. Here is plenty of speculative promise to go with the investment solidity of the transportation system [671 JAS. H. OLIPHANT & CO. proper. Latter’s 13,400 miles, recently double-tracked in effect 70% of the way from San Francisco to Ogden and 90% from the California border to El Paso, represent with 23 New York-New Orleans steamships a service of unequalled extent and the eight southwestern states traversed claim a growth only beginning. Proportions in capital structure of $599,268,000 funded debt, $372,406,000 stock and $433,994,000 surplus are sound. Nearly 60,000 stockholders consider Southern Pacific a good investment and its prospects have not been much exploited marketwise. Southern Ry. Price of Southern Ry. common stock crossed 43 for the first time in 1924 just ahead of the first dividend declaration. Then early in 1926 the rate of payment was raised from 5% to 7% and later new stock was successfully offered at 100 for subscription. In so brief a time a place in the front rank was taken. Over and above $21,000,000 common dividends paid, the company earned $33,945,000 surplus in the past three years, and this was more than a third of the accumulated $91,580,000 shown for the preceding thirty years. To contrast with $11,400,000 preferred and common dividends and record $23,597,000 net income in 1926, the range of earnings during fifteen years to 1916 excepting for the meagre 1908 and 1915 fiscal periods was from $2,290,000 to $7,078,- 000 maximum. Even on the $60,000,000 preferred stock, 5% non-cumulative, dividends have averaged omly 2.95% annually to date, and so recently as from June, 1921 to November, 1922 were suspended entirely. Altogether, however, from July 1, 1894 to December 31, 1926, before allowing on the one hand $16,000,000 discount on securities sold and on the other $30,000,000 capital charges in early years included in operating expenses, Southern Ry. has shown $125,525,000 earnings kept for surplus, after pay- ing $75,454,000 dividends, and the amount exceeds the par of $120,000,000 common stock outstanding until 1927 unchanged. With a Government valuation using 1914 costs, and with 15% of the equity composed of subsidiary company stocks carried at 95% of par and 42% of book value, Southern Ry. common stock is worth about $190 a share. Business done, as expressed in tons of freight moved one mile for each mile of road, was 271,029 in 1896, 527,029 in 1906, a 95% increase, 799,398 in 1916, a 529 increase, and 1,327,910 in 1926, a 66% increase. Presumably when the growth reached a certain [687 STUDIES IN SECURITIES point Southern Ry. earnings at the present rate became possible. For the past four years net for the common stock follows: 1926..........11.20, 1924..........12.3¢ 1825. . sina 183 1023 eae BO) Meantime operating expense ratio was cut from 75.6% to 69.4% wholly by saving in direct transportation costs. Besides its own 6,795 miles of line, Southern Ry. controls 2,425 additional, with equities 99.5% in New Orleans & Northeastern R. R., 94.29% in Mobile & Ohio R. R., 94.1% in Georgia Southern & Florida Ry., and 29.2% in Cincinnati, New Orleans & Texas Pacific Ry. Including due proportions of the results of these the real earnings behind Southern Ry. common were: 1926.. .......20.6% 1024... ... 10.00, 1925. 21.3 1928... conre12.9 The disposition has been to withdraw larger dividends from sub- sidiaries and of course full taking of earnings by lease or merger is possible some day. As simply put by the company, ‘‘the Southern Serves the South,”’ and the twelve states covered by the system have forty millions population busy with a rapid industrial development. Lines be- tween chief traffic centers are mostly shorter than competitors’. Ahead of many roads Southern has all main lines equipped with automatic light signals and ahead of all it has the longest stretch of 578 miles of automatic train control. Rise of Southern Ry. common to an investment status, at the price current giving 5.409% income, had a momentum not easy to stop, so the 15% rate of 1927 earnings, plus around 29% of subsidiary equities, will likely begin to increase soon again. Standard Oil Co. of Indiana The period since 1922 when Standard Oil of Indiana declared a 100% stock dividend has been marked for this company by two developments of interest to shareholders: surplus accounts which December 31, 1922 (after the stock dividend) stood at $69,032,000 increased to $174,420,000 as of December 31, 1926; and future sources of crude oil have been assured by acquisition of interest in widespread acreage and valuable plant and facilities in Colum- bia, Venezuela and Mexico. The 1926 year topped all others with earnings of $6.02 a share on the 9,136,618 shares of stock (plus 91 cents a share additional [69] JAS. H. OLIPHANT & CO. undistributed equity of subsidiaries) compared with $5.85 in 1925, $4.56 in 1924, $4.68 in 1923 and $5.61 in 1922. This meant operating profits before taxes of $62,599,000 against a previous record of $61,378,000 in 1920. Prior to acquisition in 1925 of a dominating interest in the voting shares of Pan-American Petroleum Co. (the terms of the deal and actual relationship not entirely clear), Standard Oil of Indiana had for years been the largest domestic marketer and the second largest distributor of gasoline. This position had been built up through production in the mid-continent field, absorption of Midwest Refining Co. in 1920-21 with its domination of Rocky Mountain fields, ownership of a half interest in the Sinclair Pipe Line Co. and entire ownership of Dixie Oil Co.’s pipe line system carrying Wyoming, Oklahoma and Gulf Coast production to the great refineries at Whiting, Ind., Wood River, Ill., Kansas City, Mo., and Casper, Wyoming, and in 1922 acquisition of half interest in Sinclair Crude Oil Purchasing Co. holding large oil reserves. Its refineries handle 300,000 barrels of crude daily and with mar- keting facilities in ten states of the Mississippi Valley from Canada to the Gulf it does 20% of the gasoline business of the country. The Pan-American deal did not involve the California properties of that corporation but carried managerial control of 1,500,000- 2,000,000 acres in Mexico with 150,000 daily production, with refinery capacity and pipe lines and the second largest tanker fleet flying the American flag. Later, control of Lago Petroleum Co. gave an interest in growing Venezuelan production. These 1925-26 developments were to provide for Indiana’s future needs so far ahead as is necessary. Indiana’s slogan, ‘“We have the last drop of oil in the world,’’ seems backed up. Balance sheet showed ‘‘Investment in Other Companies’ at end of 1926 of $129,894,000 compared with nil in 1919. Indiana’s own property accounts were only $152,080,000, showing the big ex- pansion of corporate interest in allied and supplementary com- panies. The real contribution from these investments will come in future years. After stock dividends of 100% in 1922 and 150% in 1920, and a $9.50 cash dividend rate increased by $1 extra since March, 1926, Indiana’s surplus now totals almost 80% on its $25-par stock. With gasoline consumption increasing 149% a year, substantial earning power seems assured. While its inventory at the begin- ning of 1927 was the largest in its history, which in view of the downward trend of petroleum products prices since January 1 was unfortunate, the company’s record holdings of $66,299,000 1701 STUDIES IN SECURITIES cash, Government securities, and investments provide a splendid position through this adverse oil situation. With 60-70 level held for four years, the price of the stock affords over 5% income return. Standard Oil of Indiana stock is an investment equity having interesting speculative possibilities in this gasoline motor age. Standard Oil Co. of New Jersey When in 1911 the Standard Oil Co. of New Jersey by court de- cree was stripped of thirty-three subsidiaries, it was left with a domestic marketing territory reduced to half a dozen Atlantic Sea- board states, but retained control of several producing and re- fining companies destined to enjoy rapid expansion, and suffered little interference with its foreign trade. Today, the parent company, believed to be an ‘‘empty shell’ in 1911, is the largest and most powerful unit in the petroleum busi- ness. In 1926 it had a crude refining run of exceeding 385,000 barrels daily. Crude oil production was 61,839,000 barrels, of which 34,344,000 were in United States (by Carter Oil Co., Stand- ard Oil Co. of Louisiana, Humble Oil & Refining Co., Hope Con- struction & Refining Co., and Bast Ohio Producing & Refining Co., in the states of Oklahoma, Kansas, Wyoming, Arkansas, Texas, Pennsylvania, West Virginia and Ohio) and 27,495,000 barrels through affiliations in Peru, Colombia, Mexico, Rumania, Poland, Canada, Dutch East Indies, Venezuela, Bolivia and Argentine. Over 850,000 tonnage of tankers and 2,422 miles of pipe lines were operated, 3,045,000 barrels of casinghead and natural gas gaso- line was produced, and 102,540 million cubic feet of gas was sold. Widespread marketing system includes Atlantic Seaboard states from New Jersey to the Carolinas and southwestern states through subsidiaries, as well as Canada and numerous foreign countries. The company accounts for 50% of our petroleum export business. In short, Standard Oil of New Jersey is a thoroughly integrated world-wide oil company. Against its great properties (total assets exceed $1,541,000,000) capitalization now consists of $120,000,000 debenture bonds (re- cently issued in connection with retirement of $200,000,000 pre- ferred stock) and $603,630,475 common stock consisting of 24,145,- 218 shares, $25 par value. In 1919-20 $200,000,000 from sale of preferred stock went into the property, in 1920 par value of common was reduced to $25 from $100, and in 1922 a 400% stock dividend was declared. The last two steps meant a twenty for ome split-up. [711 JAS. H. OLIPHANT & CO. Earnings immediately following 1919 fluctuated sharply as the in- dustry went through inflation and deflation, but of later years have enjoyed steady growth. The record of earnings on basis of split-up stock is as follows: Per Share “R01 2 20 20 A The 1920 earning power was probably as abnormally high as the 1921 was low. The 1927 results likely will not reach those of 1926 as first half year conditions at least have been adverse in the industry. The dividend rate of $20 a share from before the war on the old stock was carried on in the equivalent of $1 a share on the split- up shares until last December when an additional 1214 cents quar- terly extra was started. The 1926 balance sheet as reported includes the proceeds of the $120,000,000 59% debenture issue of December but the retirement of the preferred stock and the issue of $86,232,925 new common at par of $25 did not occur until this spring. Deducting there- fore $120,000,000 from current assets as of December 31 (which appeared in $198,824 000 marketable securities) the adjusted figure was $737,612,000 compared with current liabilities of $259,218,000. Assuming a dividend of $1.50 on the new common stock, the finane- ing of last winter worked out a saving of about $2,800,000 or 11 cents a share on the common. The oil industry is going through a period of severe depression, one which Standard Oil of New Jersey officials state will be more protracted than usual. It is, however, a business which changes character rather quickly at times and after all represents a per- manent industrial activity. Standard Oil of New Jersey offers in its common stock the equity in the greatest single factor in the world’s oil business, in a position to do as well as any under adverse conditions and prepared to enjoy full participation when the oil situation again turns upward. Swift & Co. Out of $950,000,000 gross receipts in 1926 Swift & Co. kept $15,- 645,000 for stockholders. This was only 1.64% profit margin and so much as 49% does not appear in a 31-year record. A fair turn- over in relation to invested capital explains how Swift has paid at [721 STUDIES IN SECURITIES least 7% dividends since 1899 and turned $84,000,000 remaining earnings to surplus. Comparison of gross sales and net earnings of Swift in 1926 with some of the other largest American corporations follows: Sales Swill & C0... vee .-..% 950,000,000 U. 8. Steel Corp......... .. 1,508,000,000 American Tel. & Tel. Co... 823,000,000 Pennsylvania R. R....... 710,000,000 General Motors Corp....... *,058,000,000 Standard Oil Co. of N. J..- 1,283,000,000 Net $ 15,645,000 116,667,000 155,061,000 67,568,000 176,085,000 117,652,000 The place of Swift & Co. among leading industrials is further borne out by an inventory of property which includes: 30 pack- ing plants, 70 dairy plants, over 500 branch houses and sales agencies, 600 car routes with 7,000 refrigerator cars to supply fresh meats to 10,000 smaller cities and towns, and 80 foreign offices placing Swift products on sale in every civilized country. By five year stages up to 1924, and then the two years 1925 and 1926, the financial record follows: Total Dividends 1900-04... ....$ 8,398,000 1905-09... «vo 16,712,000 1910-14.......... 24,937,000 1915-19.......... 40,501,000 1920-24.......... 60,000,000 1925-26 . 24,000,000 On $150,000,000 capital stock, the earnings have been as below against 8% dividend each year: 1926... .........104% 1923... 0... 000 1925... ........10.3 B020 ry crassa 1924 . Eb 1027 1088... i vi 5.2 Net return from by-products including hides diminished from over $18 per head of cattle in 1915 and 1916 to less than $12 within ten years. Considering that Swift in 1926 slaughtered 16,970,000 animals (including sheep and hogs besides cattle) the importance of conditions in fertilizer and leather industries is clear. Funded debt and bank loans, exceeding $200,000,000 beginning 1920 when inventories were inflated, steadily declined to $86,973,- 000 as of November 6, 1926, ahead of $150,000,000 capital stock. Book value of the latter was $149 after reserves. As of November 6, 1926, current liabilities were $31,951,000 and current assets $203,969,000, of which cash was $11,026,000. With a 42-year unbroken dividend record (7% 1899-1915 and 8% and extras since) under continuous family management, Swift & [731 JAS. H. OLIPHANT & CO. Co. stock has the confidence of 47,000 stockholders and affords liberal investment return. Union Carbide & Carbon Corporation Acquaintance with Union Carbide & Carbon Corp. scarcely began until four years after organization when in 1921 a financial statement was first made public. In 1926 the New York Stock Exchange listing (in March) advanced the enterprise well upon the way to general familiarity. As to its importance, the market valuation exceeds $300,000,000 and 10-millions square footage of plant space compares with 25- millions in General Electric Co. plants. Start of the company was with solid background since 1917 formation was the merger (no stock fees for promotion or services) of the leading makers of carbon products and of calcium carbide, established 1876 and 1898 respectively; the former business, how- ever, has grown and changed in novel ways. Development prior to 1921 was evidenced by sale at 40 of 762,338 shares providing $30,493,520 cash and issuance of 80,844 more for properties, from organization 42% addition to original share capital; since 1921—in the five years for which full record is available—there were further added $42,000,000 (approximate owing to changed accounting) to gross plant values and $10,- 306,000 to net liquid assets, a 32% aggregate increase, while this time capitalization was enlarged only by $5,435,000 bonds, mort- gages and preferred stocks of constituent companies. Ending 1926, the net value of plants (on 1921 appraisal basis, $158,054,000, less $27,654,000 depreciation) and other fixed assets, deducting $13,635,650 subsidiaries’ bonds and mortgages and $6,350,000 subsidiaries’ preferred stock, was equivalent to $46 per share for 2,659,733 mno-par shares of Union Carbide stock, and liquid assets net were $19 additional, making $65 share equity. Intangibles have disappeared from the balance sheet, $36,056,000 valuation for patents, trade-marks, power leaseholds, undeveloped water power, etc., shown at the 1924 year-end, being stricken from assets in 1925. Charging surplus $29,424,000 to accomplish this indicated that about $6,600,000 already had been accumulated from earnings as reserve for amortization. Following is the record of earnings per share, together with the equivalents of deductions believed mostly to represent amortiza- [74] STUDIES IN SECURITIES tion reserves for intangibles, charges : Earnings Reported 10926... eee £9.08 1928... cies emacs P 1.00 1924... . cor... 0.80 1923... . aves 16.09 1922... veins. 24.20 1921 . “0 and the net results before such Reserves other than for Depreciation * 55 { £1) 60 90 Combined $9.63 8.10 6.80 6.69 5.30 Note—In 1924, results of foreign subsidiaries were included for first 9 months only. For 1921, the figure represents annual earnings rate in 9 months beginning April. Dividend rate was increased in December, 1926, to current $6 basis from $5 in effect since April, 1924, when the $4 rate paid two and one-half years was increased; the $4 rate was begun with 1918, raised to $5 in October, 1918, to $6 in July, 1920, and resumed in July, 1921. Quoting a company statement: ‘‘The diversity of the activities of the corporation’s subsidiaries is an important factor in its stability and growth. The products are used in many industries for many purposes and yet the processes of manufacture are by no means unrelated.’’ Concentric about the electric furnace, over 120 separate plants, 1200 factory buildings, using about 250,000 electric horse-power of which at least 90,000 is owned (180,000 in reserve undeveloped), with 21,500 employes, and over 100 sales offices, make up the Union Carbide industrial group. Principal units manufacture and distribute calcium carbide, and its derivative acetylene, also oxygen, jointly used for welding and cutting; the necessary equip- ment; and separately acetylene for lighting rural homes, miners’ lamps and motor trucks; radio batteries, dry cells, carbon special- ties like electrodes; alloy steels highly resistant to heat, abrasion and corrosion; chemical compounds used in lacquer, rayon and explosives, and anti-freeze mixture for automobiles. Research laboratories are engaged in discovering new products and new or extended uses for present products. Union Carbide stock combines investment quality with speculative promise to a degree unusual. Union Pacific R. R. Physical property and appurtenant working capital on the books of Union Pacific R. R. at a net figure of $808,523,000 in 1926 pro- duced $43,957,000 earnings or 5.44% return and securities held at [761 JAS. H. OLIPHANT & CO. $236,004,000 valuation provided $14,780,000 or 6.26% yield. Total income covered $17,794,000 interest at 4.839% average rate on $412,- 771,000 funded debt and $3,982,000 dividends of 4% on $99,544 - 000 preferred stock with $37,003,000 surplus amounting to 16.6% on $222,292,000 common stock equity. Partly thanks to the huge holdings of bonds and stocks, which for twenty years have never yielded less than $11,000,000 annually or about 5% upon its stock, this company has earned more than 10% each year since 1902, and has paid 10% dividends since 1906 ex- cepting eighteen months at 8% following a 1914 asset distribution. Sum total of investment income in a quarter century is $318,560,- 000 and balance of earnings saved after dividends $284,766,000 or 90% thereof. Earnings on the common stock and the amounts con- tributed by investments have been as follows: Total 1926... . eee 16.6% PODS cee snares srreat nd 0.5 1924.... .14.3 han... “h.2 1922. 0 1927 99 From Investments 6.7% 67 6.6 7.0 6.3 5.5 Variance from year to year of investment income is notably small. Security holdings at the close of 1926 consisted of $44,114,000 (par $58,131,000) bonds and stocks of affiliated companies, $69,998,000 (par $79,222,000) bonds and $89,892,000 (par $71,514,000 and market over $90,000,000) stocks of standard railroads, and $32,- 000,000 United States Government bonds. Full ownership of Union Pacific Coal Co. returned $1,750,000 in each of the past two years and $1,250,000 dividends in each of the two preceding, and half ownership of Pacific Fruit Express $2,400,000 in each of the past three years and $4,200,000 in the fourth, together the principal subsidiaries. Among stocks of other railroads, $22,700,000 in New York Central, $44,697,000 in Illinois Central including $12,972,000 held indirectly, and $4,420,600 or a 3% interest in Chicago & North Western are owned. At maturities of Union Pacific bonds J uly 1, 1928 and December 1, 1929, $30,000,000 bonds and $34,564,000 stocks held as collateral will be released and the entire $236,004, 000 of investments becomes free in the treasury. Original reasons for these holdings are no longer good and conjectures as to disposal of them are likely to arise. With $55,587,000 cash and Liberty bonds owned in 1923, Union Pacific sold $20,000,000 bonds of its own issue for capital expenditures, and with $70,972,000 in the treasury in 1927 sold $26,835,000 414s to refund 4s, so perhaps some plans are taking shape. = 761 STUDIES IN SECURITIES ie, ta More important than these investments of demonstrably sound value upward of $100 a share including $20 equivalent in affiliated companies is the equity in the railroad for Union Pacific common stock. The system of 9,647 miles reaches into the developing Pa- cific Northwest and Southwest and to and from Omaha or Kansas City has an average 380-mile haul of freight as a basis for earning power. Management is able and in 1926 reduced the expense ratio after six years above 70% down to 68.59% bringing the pre-war ratio of 60% or less nearer into view. As an investment, Union Pacific common compares favorably with not a few bonds, in particular as it has the elements for specula- tive advantage to come. United States Steel Corporation The common stock of the United States Steel Corporation, which in 1901 was considered to have no equity at all in tangible assets and indeed was only 30% covered by the par value of securities of the consolidating companies, in 1927 received a 40% stock dividend, which capitalized less than 20% of the surplus earnings meanwhile accumulated. Thereby, the management re- sponsible for making the world’s foremost enterprise what it is indicated a belief at last in the fitness of the property to give the owners greater returns, having stated a year previous that a stock dividend when paid ‘‘would add to the amount of cash dividends on common stock if and when declared, and might possibly, in times of depression, interrupt their continuity.’’ Distribution of $203,321,000 additional eommon stock, bringing to $711,623,500 the total issue, is from a surplus, undivided and appropriated, of $823,502,000 beginning this year. Allowing for the $25,000,000 provided at organization, such surplus is $206,752,- 900 less than balance of earnings shown in 2534 years. This amount was written off in reduction of property investment ac- count, against which in addition $722,026,000 balance in reserves was built up. Property was carried at $1,298,000,000 in 1901 with 9,425,000 tons ingot capacity, while following $1,525,000,000 actual expenditures the valuation was $1,667,000,000 in 1926 with 23,177 - 000 tons ingot capacity. Taking to be in fact segregated surplus the $81,183,000 in sundry reserves other than for insurance and the $50,143,000 inventory reserves, the total equity on the basis of a highly conservative plant valuation was $1,463,162,000 at De- cember 31 last, or $205 a share for the newly increased common Stock. 77] JAS. H. OLIPHANT & CO. _— Te A policy of intensive rather than extensive improvement pursued in recent years definitely benefits the earning power of the Corporation on a given volume of business. Since the wartime ex- pansion ending 1918, when $302,776,000 plant expenditures of which $103,301,000 were charged to earnings as inflated cost had left capacity at 22,340,000 tons, there has been $518,156,000 added to property account and $414,702,000 to reserves against it with increase in capacity only 840,000 tons. These outlays provided both mills for finished products, adding breadth to the business, and modern facilities for economical operation, replacing hands with machines. Consequently a tendency of prices to fall and wages to rise has been successfully met: Jperations (per cent. capacity) 1926. ..... 1925..... 1024... .] 1923... 1922.... 1921....9 1920... 1939... (D Prices ‘change er ton) " lower AIT 2h’ the Wages Tails) Earnings (per share new) $12.80 9.20 8.40 11.70 a1 2.03 0.73 1.60 7.00 11.90 6.17 7.95 Record peacetime earnings were turned out in 1926 with rate of operations the same as in 1923 and 1920 although prices were less than in 1923 and daily wages more despite abandonment beginning 1924 of the twelve hour day. From the by-products at one time wasted the Corporation by 1925 had developed earnings equal to $3 a share on the new amount of common stock. Budget for re- search work is now being enlarged substantially. Before the net available for dividends, and besides the allow- ance of $120,000,000 yearly for maintenance and repairs, United States Steel sets aside an increasing amount annually to make good any depletion and depreciation of assets. These reserves if re- lated to the gross plant value were 2.3% in 1924, 2.59% in 1925, and 2.8% in 1926 and if figured on the present common stock were $6.85, $7.90 and $9.00 a share respectively. Liberal reserves of course are necessary to care for the discard of facilities when bet- ter are found and for the doubling of dollar cost when a new plant replaces an old one. Whether this burden on earnings may not be lightened is conjectural. A regularly increasing part of the depreciation allowance goes to sinking fund for bond retire- ment. From a peak of $643,099,000 in 1912 funded debt was re- duced to $492,689,000 in 1926, and interest from $33,301,000 in 1913 to $25,515,000, a saving equal to $1.10 on the new common shares. The bonds in sinking fund, $214,204,000 in 1926, continue [781 STUDIES IN SECURITIES to draw interest and so the saving does not take effect, but the ap- propriation thus accelerates by about $500,000 annually and $603,- 000,000 bonds, including the present sinking fund holdings, will be out of the way in less than twenty years. More liberal participation by the common stock in earnings, apart from the 2534 % extras received with 5% regular dividends from the abnormal 10934 % aggregate earnings in the 1916-1918 years, had a real beginning with extras 14% in the last 1923 quarter and 14% subsequently until in June, 1926 a 7% rate was made regular. The 79% dividend continuing on 40% increased stock is equivalent to 9.80% on the old amount, and the virtual doubling of the cash return in less than five years is witness to the progress of this fine investment equity. Western Union Telegraph Co. The last turning point in Western Union Telegraph Co. affairs was in 1910 when, following disposal of a telephone interest and accompanying complete rearrangement of operating system, the company had all physical property appraised and made up a new balance sheet. Plant value on that basis was $133,989,000 ending 1910. Addi- tions thereto in years through 1926 totaled $128,594,000, and during only the five years ended December 31, 1926, a total of $38,000,000 was charged against earnings and credited to the reserve for depreciation of land lines, these two items together hespeaking a thorough-going renovation. According to usual public utility practice the sale of securities would have provided the expansion funds, but Western Union shows only $29,934,000 increase (including sale of $25,000,000 5s of 1951 last year) in capital obligations since 1910. (The increase was $37,000,000 in 20 years preceding.) Required capital came $24,333,000 from proceeds of New York Telephone stock (sold to A.T. &T.), $69,347,000 from surplus earnings after dividends and the balance from other sources including unexpended reserves charged out of earnings. Per share of stock Western Union in the 16-year period earned $164, and paid $96 in dividends, leaving $68 to plow in. The record of expenditures testifies to soundness of the $171 a share book value shown at the end of 1926, and corroboration is expected in a forthcoming Interstate Commerce Commission valu- ation. [791 JAS. H. OLIPHANT & CO. 3 Capitalization comprises $72,651,000 bonds, $1,771,000 sub- sidiaries’ stock, and $99,786,530 Western Union stock. Earnings for the stock have risen along with the equity : against 8% average 1911-17 the net was 13.2% in 1922, 13.6% in 1923, 13.4% in 1924, 15.29% in 1925, and the same in 1926. No set dividend rate has long been kept by the company (although, formed in 1851, it has paid something each year since 1874) and the 7% standing since April, 1918, has just been supplanted by an 89, rate. The web which is Western Union involves approximately 213,400 miles of pole lines, 3,300 miles of land cables, over 28,800 miles of ocean cables, and 25,000 separate offices. It does 85% of all land mes- sage business and this gives 92% of the company’s net income, a fact dispelling radio fears. Over 66% of messages are handled automatically now (eight messages can go over one wire) and so the labor hazard constantly lessens. The business has been brought to a point where employes are receiving ‘‘income participation’’ (a total $9,200,000 charged expenses therefor in six years; last year supplanted by offering of stock on favorable terms, 30,000 shares subscribed for by 8,700 employes) and stockholders perhaps may look for something addi- tional (possibly subseription ‘‘rights’’) above the strongly protected 89, dividend. F. W. Woolworth Co. Reinvestment of profits has provided the entire financing of the expansion of F. W. Woolworth Co. from a pioneer enterprise with $52,616,000 sales and $14,925,000 net tangible assets in 1911 to its present rank as a leading merchandising company with sales $253,- 645,000 and net tangible assets $114.804.000 last year. Since formation in 1912 by merger of six non-competitive ‘‘five and ten cent’’ chains, the development has been one of America’s industrial romances. viz: Stores 1926..... .1480 1023.... 1260 1920... 1 a17 a + 1912. 7 631 Sales $253,645,000 193,447,000 140,919,000 98,103,000 69,620,000 60.558.000 Net Earnings on Sales on Stock 129, *$10.85 10.70 31.84 7 13.87 16.72 10.87 R73 7 *On $25 par changed from $100 par in 1924 by issue of four shares or one. [80] rs. STUDIES IN SECURITIES Capitalization originally consisted of $15,000,000 7% preferred stock and $50,000,000 common, $100 par value, the latter repre- senting $50,000,000 of good-will on the balance sheet. In the past fifteen years, the $15,000,000 preferred stock has been retired and the $50,000,000 good-will written down to $1, all out of earn- ings. In 1920 a 30% stock dividend was declared on the common stock, in 1924 the par value of the common was reduced to $25 from $100 by the issue of four new shares for each one of old stock, and in February, 1927, a 509% stock dividend was declared, bring- ing the capitalization now to 3,900,000 shares of $25 par common stock. There are $3,432,500 purchase money mortgages outstand- ing and a contingent liability on $10,000,000 guaranty of obliga- tions on the Woolworth Building, latter easily protected by the building’s value. At the end of 1926 current liabilities were $4,294,000 (including $3,700,000 tax reserve) and current assets $49,373,000 (including $17,244,000 cash). Real estate and buildings owned and leased are carried at $20, 270,000 on the books, and rental receipts in 1926 from leases and subleases amounted to $2,140,000. The company charges off 5% per annum for depreciation of fixtures and 215% on buildings. The speculative possibility in Woolworth shares is two-fold : 1. Since 1906 the sales have increased each year without fail and net profits with few exceptions; in the first quarter of 1927, 25 new stores were opened in the United States (making the total 1505) and at least 50 more will follow before the year ends; from 1912 to 1926 the capitalization per store decreased from $103,000 to $44,000, whereas sales per store increased from $96,000 to $171,000 and profits from $8,600 to 419.000. 92. Woolworth has a majority interest in its English sub- sidiary which operates 242 stores in the British Isles and plans 50 additional in 1927. In 1926 the book value of the interest in the English company was written up $13,566,000 to $14,505,000. The invasion into Germany will show per- haps 10 stores operating by this year-end. The 1926 net was equal to the current $5 dividend on the enlarged stock once and a half times, and 1927 indicates a new record of sales and even a better margin of profit than 1926. The steadiness of this company’s expansion gives assurance to the $5 dividend and its past record of growth is the basis of expectation of larger income return. [811] Other Publications Prepared and distributed by us are the following: Yearly Mundy’s Earning Power of Railroads A concise manual of statistics and other facts relating to the history, earnings, finances, and securities of about 125 railroads. Compiled to permit ready comparison among companies. The volume is pocket-size but contains over 600 pages. Available for distribution in October. Monthly Studies in Securities Arranged with necessary perspective to assist the individual in judging the merit and promise of established industrial, public utility, and railroad securities, giving special atten~ tion to the investment qualities of seasoned common stocks. Daily Morning Letter Timely facts and figures bearing on the markets, and opinions regarding specific security values. SA Pamphlets Are Old-Line Stocks Unduly High? An outline of our reasons for a conviction that many stand- ard investment securities were due for more complete restora- tion to prominence and favor as the influences of peace- time conditions came more and more into play. Published in May, 1927. Safeguards in Investment A discussion of the risks tnwolved in various forms of com- pany financing. Published in 1911 and reprinted with comments in June, 1926. Present Day Application of Enduring Invest- ment Laws A declaration of faith in certain principles of value govern- ing security prices. Published in 1920 and reprinted for the third time with comments in April, 1926. No Securities to Sell Te ADDITION to the facilities available to clients for execution of orders on the es- tablished Exchanges, we offer experienced service in the purchase and sale of unlisted securities. We invite inquiries regarding the purchase of securities on conservative margin. Suggestions as to investment of the funds of individuals, trusts, or institutions will be prepared upon request. All recommen- dations are free from any prejudice due to the ownership of securities. Our various publications which are listed on the page opposite will be sent regularly if desired. G9 Jas. H. Oliphant & Co. Fstablished 1898 Members New York Stock Exchange Members Chicago Stock Exchange Members New York Coffee & Sugar Exchange, Inc- NEW YORK 61 Broadway Offices connected Telephone by private wire Whitehall 2200 , CHICAGO The Rookery Telephone Central 7691 Date Due + Library Burean Cat. no, 1137 FHS lll arr 206$07595948 tion reserves for i charges: 1926... cv. (098. vives 1024. ixonis 23... Teli BO Note—In 1924, res 9 months only. For 19 months beginning ADT Dividend rate was basis from $5 in eff two and one-half ye 1918, raised to 5) resumed in July, 19 Quoting a company of the corporation’s stability and growth for many purposes ; no means unrelated. Concentric about the 1200 factory building which at least 90,000 with 21,500 employ Union Carbide ind and distribute caleiu oxygen, jointly used ment; and separately lamps and motor tru ties like electrodes; and corrosion; chem explosives, and anti laboratories are eng extended uses for p Union Carbide stock promise to a degree i Physical property & of Union Pacific R. duced $43.957.000 eaf iq # iw ; 2 SECURITIES 1d the net results before such 0 N Reserves other than for Depreciation $.55 57 50 60 90 wo nN Combined $9.63 8.10 6.80 6.69 5.30 2 iE oy) om > n subsidiaries were included for first epresents annual earnings rate in 9 NO i December, 1926, to current $6 il, 1924, when the $4 rate paid sed ; the $4 rate was begun with 918, to $6 in July, 1920, and — 0 3 ‘The diversity of the activities is an important factor in its cts are used in many industries yrocesses of manufacture are by nace, over 120 separate plants, t 260,000 electric horse-power of 80,000 in reserve undeveloped), 100 sales offices, make up the . Principal units manufacture nd its derivative acetylene, also nd cutting; the necessary equip- or lighting rural homes, miners’ tteries, dry cells, carbon special- ighly resistant to heat, abrasion ds used in lacquer, rayon and ire for automobiles. Research ering new products and new or ts. estment quality with speculative — oO oO 0 oD CO oO NY ific R. R. o Jus § 0 -—q i at working capital on the books ure of $808,523,000 in 1926 pro- 9% return and securities held at oo 3 { 1 >» ~~ 0 0 ~ be