The Bridgeport evening farmer. [volume] (Bridgeport, Conn.) 1866-1917, 1911-09-29
Tobacco Industry
And Its Profits
Vast Earning Power of Great
Combination = Enormous In
flatiOn of Value of Securities
Report of Commissioner of
Corporations Smith

Commissioner of Corporations Her
pert Knox Smith in submitting the
second part of his report on the to-
bacco industry which deals with earn
lngs, capitalization and investment
says 1t shows the vast earning power
that arises from substantial control
OF a large industry; 'The great to-
centers round the American Tobacco
Company, started in 1890 with $685.
o0o,000 capitalization, operating only
In cigarettes. By 1908 it controlled
about four-fifths of the whole domes-
tic tobacco industry, except cigars,
and its net capitalization exceeded
$316, 100000. This concentrate is
the basis of the com bination's great
earning power. High rates of earn
! ings have gone with monopolistic con-
troll OF the industry, and the less the
degree of control the less the rate.
| In 1890 the combinations earn
lngs were over 1S per cent. on the ac
tual investment. They rose in 1891
to more than Fl per cent. 1t was
then operating principally, and with
a practical monopoly in cigarettes. In
| 1895 came expansion into other
/ branches, keen competitive strug-
| gle, and sharp drop in earnings. But
| by 1900 the combinations broad DOM
1nation of the whole industry took eff
| fective shape. Its earnings from that
| date cover the great bulk of the in
| dustry. In 1901 they were 13 per
i cent. in 1908 over 16 per cent. and
from 1904 to 1908 the average was -
/ per cent or $31, 100000 yearly. This
| was the earning power of substantial
monopoly, the result of the concentra-
j ton above stated.
Earnings in Particular Branches.
Here appears, even more striking
1 ly the earning power of concentrate
ed control. In the snuff business the
i n ina hoe oil 1ot<
| monopOly-96 per cent. of the whole
| business. From a rate of less than 8
! per cent. in the first year (1901), the
| earnings rose in 1903 Yto Is per cent.
and in 1905 to over % per cent. The
| common stock of the snuff company,
originally all water, paid 20 per cent.
dividends in 1909 and 81 per cent.
in 1910. In the highly controlled
smoking tobacco business the average
earnings of it's important subsidiaries
| increased from IT per cent. in 1900 to
So per cent. in 1908. Conversely, the
subsidiaries. engaged in the f1at-plugl
business, with more active compete
| ton, in no year earned 10 per cent.
in 1906 less than s per cent. Final
ly, in the cigar business of which the
| com bination controls not over 15 per
cent, its rate of earnings has never
| exceeded 9 per cent, and from 1904
to 1903 averaged less than per cent.
| This business, moreover, showed ex-
/
! 1908. Here were severe competition
and low earnings.
Earnings of Independents.
"The combinations rate of earn
| ings has far exceeded that of it's COM
| petitors. Its rate in 1906, repre-
sentative year, was about two and
one-fialf times the average rate for
| forty-eigh of the most important in
dependent manufacturers of smoking
and chewing tobacco and snuff. The
earnings of those Independents, more
over, fairly represent the average rate
nation of the combination-roughly
| speaking, the competitive rate.M In
other words. the com bination has
more than doubled the average level
of earnings on it's share of the bus
mess.
''The~ results of the Spanish-war
tax upon tobacco products especially
| illustrate the monopolistic power OF
the combination. When that tax was
imposed. in 1898, prices were gener-
ally raised. In 1901 and 1902 the
tax was reduced to its former basis
enough to keep it's prices on the high
err level. It thus absorbed practf-
cally, al' the benefit of the reduction,
adding millions yearly to its income
This episode shows the unforeseen re-
suits of monopolistic conditions not
fully recognized. The tax reduction,
of course, was intended to benefit the
consumer. AS q matter of fact, II |
benefited almost solely the controlling |
interest in the industry.
Valuation of Assets.
1.-THE combinations capitalization |
is much greater than its factual in
vestment. The difference lies in the |
value attributed to good will. The /
tangible assets (plant and workins |
capitaD have usually been centered
on its books at approximately their |
in its domestic business alone stood
on the books in 1908 at, roughly, |
$14S, 100000 whereas the bureau, ar
ter careful analysis, has computedl
its actual cost (not present value) at
$64, 100000, or 35 per cent. of the en-
tire investment. In this allowance OF
sixty-four million the bureau recog-
nizes the great value of good will
Chiefly brand value) in the tobacco
industry. Over and above this, how
ever, at almost every important step
in the expansion of the com binationI
there have been issued against that
good will great blocks of new secur-
tiles representing nothing but overval-
uation, or capitalization of monopolis-
tic power
Insiders Profits.
Through adroit and frequent adj
justments of the securities of the COM
bination. a very large part of it's
great earnings have gone to a small
group of insiders, who have thor
oughly retained substantial voting
control These insiders in 1901 in
duced the common-stoek holders or
the old American and continental
companies to surrender their stocks
for per cent. bonds of the new
Consolidated Tobacco Company, thus
securing for the common stock of the :
Consolidated (most of which the In ]
siders held) the great increase in !
earnings which they foresaw, from I
the reduction in the war-revenue tax. I
This increase the rank and file of I
of the older concerns did I
not foreSee. In the reorganiza ton
in 1904, the advantage of the insid- {
ers was perpetuated. Of the book {
profits of the new American Tobac- |
co Company in 1910 (not the earn s
ings' as revised by the bureau) name {
ly, 100000, only about $5,30O,0OO
went to the holderss of the $104, 000,-
900 bonds, $4,70O,000 to the holders s
of the $79,0OO,000 preferred stock, I
leaving no less than $25, 100000 for
the comparatively small number of t
holders of the s40,000,00e common {
stock. which alone has voting power.
This. was over so per cent. on the /
common stock in one year not includ- 9