New-York tribune., 1911-09-25
WATER POURED INTO
TOBACCO TRUST STOCK
Insiders Got Lions Share Of
the Profits, Commissioner Of
Corporations Says.
ENORMOUS FORTUNES MADE
More Than 400 Per Gent Divi-
dends on Original Invest
ment-The Earning Power
Of Monopoly.

ment-The Earning Power
of Monopoly.
Washington, Sept 24.-The second part
Of the report Of Herbert Knox Smith,
Of Corporations, on the to-
bacco industry was made public to-day.
It deals with the earnings. capitaliza-
tion and Investments Of the great com
bination which centres around the Amer
ican Tobacco Company. II brings out
clearly. the Commissioner says, the fol-
lowing principal features:
An enormous excess Of capitalization over
actual investment for the principal COM
Danies I'm the combination and corre-
spending generalization Of intangible assets
Dr good Will
Very high rates Of earnings on the actual
investment In most departments.
marked coincidence OF low rates of
earnings and a low degree Of control where
the latter occurs.
s remarkable increase IN the rates OF
earnings as the combination became more
effective in its control
The ability OF the combination 70 appro-
pirate az additional profit practically all OF
the reduction in the Internal revenue tax
On manufactured tobacco after 1901 and 1902.
The appropriation By a small but power
fUl inside group Of hnanciers OF a large
share Of the profits Of the cOmbinauOn as a
result Of a readiUstmeut OF its securities.
A much lower rate of earnings by in
dependent concerns than By the comDina-
ton.
Great Earning Power.
Tracing the history Of the combination.
the report SAYS:
The great tobacco combination. which
centres round the American Tobacco Com
uany started I'm 1890 with S2J,0oO,ep capital
IZation operating only in cigarettes. BY
1905 IL controlled about foUr-tifths OF the
whole domestic tobacco industry, except
cigars. and its net capitalization exceeded
1915 900 600 This concentration il the oasis
NJ the combinations great earning power
High rates of earnings have gone with
control Of the Industry. and
the less the degree Of control the less the
rate.
In 1920 the combinations earnings We're
over Is per cent on the actual investment
They rose In 1891 TO more than q per cent
II was then operating principally, ana Win
a Dra ctical monopoly, in cigarettes. In 1879
came expansion into other branches. keen
rOuppt tive struggle and a sharp drop IN
earnings But by 1900 the combination $
broad domination of the whole industry
that date cover the great bulk Of the in
lustrv In 1901 they were l2 per cent, IN
1903 over 1f per cent and from 1904 10 1905
the average was 10 per cent, or 81, 10000
This was the earning power Of substantial
the result Of the concentration
above stated,
Accumulated Enormous Fortunes.
Repeated infations Of the securities Of
the combination, Commissioners Smith
says have been extremely profitable 10
the stockholders. and have resulted in
the accumulation Of enormous private
fortunes. "A an instance he points out
hat an investment in the common stock
Of the American Tobacco Company made
at its organization in 1890 and held in
tact TO the end Of 1908 would have re-
ceived in dividends excluding 100 per
cent Of stock at par in 1Sl9) more than
400 per cent on the original amount.
And i'm addition 10 this the market value
of the securities at the end of 1905 would
have been $50 per cent in excess Of the
par value Of the original securities. The
dividends received in this period. the in
Fatiou Of the securities and the appreci-
therefore. amount to nearly 1000 per
cent on the original investment. Even II
the stock held had been exchanged for
bonds Of the Consolidated Tobacco Com
panv in 1901. the dividends, interest and
excess Of the market value Of the secu-
rites would have amounted TO 521.5 per
cen. of the original par value Of the in
vestment, the Commissioner asserts
adding
The results Of the enormous irHstion and
appreciation in value Of the securities anc
Of the dividends paid are seen III a more
striking Wav when the growth IN the in
vestment Of one Of the original concerns
that entered the American TohdccO com
pauv is considered. The ". Duke sons q
Co business in 1855 was valued a S-vn,Op
and in that year capitalized at this figure
fu fG-C az S7O. 900 Without other additions
than surplus earnings this business formed
the basis. I'VE years later. for the issue OF
g.. .iG1pN1 Of stock Of the American Tobacco
Comuany E},0O000O preferred and 8, 800 M
common stock. This stock, partly as tn'
result Of the 100 per cent dividend on ths
common In lS9a partly on account OF th'
Issue of 5000 Of bonds for each 500 of com
mon stock In 1901 and partly on account ~
the readIustment of the securities n 1904
had increased IN 1905 10 securities Of pal
value Of S22,Oo000o. From 1890 70 1905, more
over. cash dividends and interest paid on
the stock and bonds based on the Duk'
business amounted to si6 I32. 800 The pal
value of the securities and the cash divi
dends TO the end OF 1908, therefore, amount
Cd 10 nearly $50 0ND. .ON0, or 1856 times M
canita1iZed value Of the Duke business II
1856 BY taking the market value of th'
securities tho results would be practically
tho same.
This remarkable appreciation takes int
consideration only the establishments Of The
stock Of the American Tobacco Company
and the dividends paid thereon. The prOiti
derived from the additional investment if
the stock of tie Consolidated in 1901, such
profits going principally 10 a few insld'
interests. make the results still more start
ling The dividends on this stock and, aftel
the merger, on the common stock OF IN,
new American. into which n was converted
and the appreciation Of It's value amounted
I'm the short period le0l-l90s TO 360 per cen
on the par value Of this additional invest
ment.
These enormous profits resulting from IN,
imitation Of the securities and the dividend,
paid thereon rest, IN their ultimate ana =
Sis Ipon the monopOlistic advantage,
obtained in this industry through concen
tation ~ control
The Commissioner saws that through
adroit and frequent adjustments Of the
securities Of the combination a very
large part OF its great earnings have
gone 10 a small group of insiders, vino
have throughout retained substantial
voting control ON this point the report
says
These insiders IN 1901 induced the com
uOn-stock holders Of the old American ano
Continental companies n surrender then
stocks for per cent bonds Of the new
consolidated Tobacco Company, thus secur'
ing for the common stock Of the Con.