Evening journal. [volume] (Wilmington, Del.) 1888-1932, 1922-01-23
What Should Railroads Earn?

WASHINGTON, d. c.. Jan 21v-
Jerome j. Hanauer, OF Kuhn, Loeb
& Co., Investment Bankers, testified
before the Interstate Commerce
Commission as TO the rate of return
on railroad property investment nee
essary to establish the credit of the
roads and put them in position to
expand Their facilities in accordance
with the country's needs. He said
in part:
Full Consideration Of the condi-
lions affecting railroads and the re-
lations OF investors thereto. lead
conclusively to the decision that a
liberal return on the value Of the
railroads IS essential, not only to
their prosperity. but to the prosper
ity Of the entire country.
No figures Of the exact division Of
railroad securities between bonds
and shares is available. In order,
however, to be tra-conservatiye
with our figures. let us assume that
two-thirds OF the value OF the prop
critics is represented by bonds and
only one-third by shares. The aver
age net cost of the part represented
by bonds is surely S per cent, prob
ably more.
The part represented by stock, lin
view OF no profit being figured in
this calculation on the part repre-
scented by bonds) should earn a
profit OF not less than 10 per cent
to allow for a fair dividend, certain
capital expenditures and a margin
Of safety for lean years. This would
make a fair return on the entire
capital value (not. of course, capital
securities outstanding) 6 2-3 per
/ cent. per annum.
1t is quite impossible to fix rates
which would bring this return I'M
der anything like present conditions
| No good purpose would be served
by attempting TO do so. The return
now provided by the Transportation
Act Is not being reached even witt
present reduced expenditures fol
maintenance. An increase of the
permissive return can. therefore, b,
left TO future consideration.
Any indication, however, OF reduc
ing the rate of return now permit
ted, in the face OF the fact that thil
rate is far below that required I,
induce investment in Junior securi
ties and shares of railroads, and IA
below the return obtainable from
other forms OF investment, woul,
ALLEVIATE whatever confidence re
mains in the future OF our railroad
and their securities
At no time since the passage o
the Act have the carriers earned tn
permissive return, and, contrary L
the belief held by many, there is n
| guarantee whatsoever. The Com
panies are to earn the return II the
can, but IL they do not, they are no
even permitted. except to a limite'
extent and for special purposes, G
recoup themselves, out Of earning
in excess of the permissive rate
earned in more prosperous times
transportation Companis are sub
ject to the same economic forces a
any other business endeavor; the
will have good years and bad year
and, unless they have a guarante
(Which do not favor). they must b
| ptNhiAAta 10 builu UP a nubsAdHild
surplus in the good years. 10 enabl
them to survive in times OF depres
sion. Only thus can their credit b
stabilized, so that they will be abb
to give to the country that efficier
service, without which its industrl.
life win be stlfed.
Because the railroads perform
great public service. investment I
their securities should be encoui
aged by a return at least as iarg
and II possible more stable than tina
which can be obtained from an
form OF private investment havin
similar risks and similar oppOrtun
tiles
Little First Mortgage Bond
Financing Can Now Be Done
To all intents and purposes frs
mortgage bonds are a thing Of tn
past. The large additional amount
required hereafter must be raise
by junior securities, for which tn
obligation itself OF the particula
Company will be the main reliance
and by the sale Of additional pre-