The Topeka state journal. [volume] (Topeka, Kansas) 1892-1980, 1906-08-30
WATERED sTOCK-AND OTHER
THINGS

/ cussed the more il seems that common
carriers might probably be governed in
some such manner as banks are now
controlled They should not be allowed
to pile up great fortunes for their own
ers through the manipulation of wa
tered. or fictitious stocks. but they
should be allowed to make as generous
/ profits. through good management, as
/ do other lines of business, and these
profits should increase as the legitimate
value OF the railroad increases.
But" says a correspondent in a let
ter to the State Journal. nobody has
yet been able to give a very clear
definition Of 'watered stock
Which is very true, unless it be that
watered stock is that which represents
a fictitious value; and to determine
what value is real and what fictitious
is difficult matter in public service
corporations as organized at present.
Under the present system railroad
may be capitalized for $4,000 600 pre-
ferred and an equal amount Of common
stock. Suppose it costs SO COO, 600 to
build the road, the common stock rep
resents no investment whatever Sup
pose Furthermore that the stockholders
do not put up the 10000, 900 to build the
road on their preferred stock, but they
bond the road for that amount loaning
the money themselves as individuals to
the railroad company which they own
collectively. The bonds then represent
the original cost of the road, and the
stock represents no outlay whatever.
But under present prosperous condi-
tions-if the management were good
the stockholders would be entitled to
return of perhaps 10 per cent on their
actual investment Suppose the bonds
bore per cent interest and the pre-
ferred stock was entitled to s per cent
dividends If the return on the actual
Investment were 10 per cent it would
leave nothing for the common stock
But If high enough rates could be
charged to earn Is per cent, the COM
mon stock would receive per cent
dividends, provided all the profits went
into dividends. AS a matter of fact,
it is the policy of American railroads to
nut a portion of their earnings into
betterments, and to hold some in re-
serve.
The way railroad stocks are selling
at present. this sort of a showing would
send both the preferred and common
stock to par, although they represent
no original investment. If the stock
holders wished to unload they could
sell their common and preferred stock
for $40, 900, 900 and still keep the 100000
GOO of bonds which represented the or
iginaI cost of the road. 1t is a case Of
eating your cake and having it, too.
Now the question is, is this fair? Is
it right for a railroad company to
charge such high rates as to enable it
- cot
represents no Investment? Is it right
for railroad promoters TO be enabled
thus to triple their money on a speeu-
lation at the pubIic's expense? How
much Of the stock in this case is water2
Suppose a man buys a $500 lot and
builds on it a $4,000 house for rental
purposes. His actual investment is
SO, 900, but he could not borrow on it
anywhere near this actual value with
the property as the only security. He
rents the house for SIS month.
bringing $500 gross, from which
should be deducted taxes, insurance
and repairs, leaving him perhaps Z per
cent on his original investment.
But a boom comes on. His property
advances in value to $4,000 and he
rents it for $50 a month, netting him
perhaps 9 per cent on his original in
vestment.
Another example: A few years ago
& Kansas farmer bought a quarter sec
ton of land at $40 an acre. His crop
from it this year will be worth $500.
His time in some other line of business
would be worth perhaps $1,000 a year,
so his net profit would be $500, or a
little less than 20 per cent on his
original investment. But in the mean
time his land has doubled in value,
because of improvements and cultiva-
ton, so that his income on its present
valuation is less than 10 per cent.
There are those who maintain that
railroad should be allowed to make
only a fair earning on its original in
vestment-and that a fair earning is
the current rate of interest for money.
The state Journal can not acquiesce
in this view A railroad is entitled to
an increase in value owing to better
ments, or to the development of the
country through which it passes, or to
other reasons, the same as the owner
of real estate is entitled to an advance
in the value of his property. and it is
entitled to such rates as will pay it a
reasonable interest upon that advanced |
value. The question is, what is this
advanced value?
Heretofore it has been limited only I
by what the traffic will bear The /
railroad company waters its stock or
issues bonds to whatever amount it |
sees fit. and if the charges 1t can make
and the traffic It can secure will pay
interest and dividends on it, that is the
value of the road, no matter If it is
five or ten times the original invest
ment In that way fictitious value is
maintained. and the excess constitutes
watered stock.
The public does not need to be told |
that this system is wrong. Yet in good |
times the railroad has an advanced |
"a Illa nner is nrieinal cost and tt,a