Opinion ID: 372907
Heading Depth: 2
Heading Rank: 1

Heading: Comparison with AT&T

Text: 131 While suggesting that the Satellite Act entitled COMSAT to rely more heavily, perhaps, then other regulated companies upon governmental support, COMSAT has conceded that nothing in the legislative history of the Satellite Act or any other statute entitled it to a certain level of profit, or even a profit at all. The objection eventually condenses to a comparison of the rates of return actually earned by COMSAT over the course of its history, and those earned by AT&T as a comparable regulated company. COMSAT claims that it is not comparable, that it is a more risky enterprise than AT&T. It correctly cites the Commission's finding that COMSAT was more risky until 1973, and asserts that nothing has changed since then to make it less risky. We are not concerned with the years before 1973 since we find nothing in COMSAT's particular situation to justify a departure from the usual rule that past losses are immaterial to present rate-setting proceedings. 132 As for the present, it is a truism that AT&T generally is not a risky investment, though the degree of risk varies with whether one is talking about its common stock, its preferred stock, or its bonds; and in each of these there may be substantial risk to one's investment objectives immediate or distant depending on the price and the state of the market generally. AT&T may be a less risky enterprise than COMSAT, but that does not make it a less risky Investment opportunity. The price of AT&T stock has not ranged as widely as COMSAT over the years both have existed, 77 and COMSAT's variance has been entirely on the upside since it was offered at $20. The Commission used AT&T to compare with COMSAT, and for that reason, COMSAT's rebuttal based on dividends and book value is not an inappropriate exercise. However, one must keep in mind that an investor who buys AT&T stock at a relatively high point and watches it fall will be little convinced that his investment was not risky because AT&T never missed a dividend. 133 COMSAT has placed great reliance upon a depiction of the returns of each company from 1964 to 1973. See Table in Brief of Petitioner at 35. The table shows the book value per share in 1964 and in 1973 for COMSAT and for AT&T, and the dividends per share compounded at 6% Per annum from the year declared through 1973. The sum of that figure and the increase in book value per share is listed as Total Return, which is then expressed as a percent of the 1964 book value in each case. The result is a figure of 81.14% Total return for COMSAT and 136.00% For AT&T. COMSAT argues that its rate of return is therefore less than what the statute requires as just and reasonable. 134 The comparison is fundamentally false. COMSAT has nothing but equity in its capital structure. 78 Every dollar represented in book value corresponds to some investor's equity holding. AT&T, by contrast, has maintained a considerable amount of debt in its capital structure throughout the 1964 to 1973 period. AT&T's earnings were made partly upon its equity capital, and partly upon the capital it borrowed generally at a lesser cost than the dividends it pays on its equity holdings. A fixed rate of interest had to be paid on the borrowed capital, but having met that obligation, the remaining portion of earnings on the borrowed capital was available to AT&T to pay out in dividends or retain as earnings. 135 What makes COMSAT's comparison unsound is that the Total Return is expressed as Percent of 1964 Book Value. In 1964, AT&T had $9.176 billion of debt outstanding and $18.860 billion of equity, for a debt-to-capital-ratio of 32.73%. 79 By 1973, AT&T had a capital structure consisting of $28.371 billion in debt and $31.224 billion in equity, resulting in a debt-to-capital ratio of 47.6%. 80 Hence, over the relevant years, AT&T increased its amount of outstanding debt by over $19.194 billion, which more than tripled its 1964 debt level; and its debt Ratio increased by almost half. During all this time, COMSAT floated no bonds at all. 136 Thus, not only do the figures for AT&T reflect a rate of return on borrowed capital, which COMSAT did not have; but also, most importantly, they reflect a return on an ever-increasing Amount of borrowed capital, resulting in an ever-increasing leverage of equity over debt. It would have been imprecise enough to compare a leveraged company with an all-equity company, but to compare COMSAT with AT&T whose ratio of debt was Increasing substantially over the period presents an even more distorted result. 137 If a comparison with AT&T is deemed informative, the figures should attempt to reflect the return earned by AT&T, and by COMSAT, on the Equity represented in the capital structure of each. Based on the figures set forth, the average level of equity for AT&T was $25.042 billion over the 1964-1973 period, and the average level of debt was $18.773 billion. The $37.78 per share total return does not include the earnings that went to debt service; adding back an approximation of 6.5% Debt service per year (compounded on the amount of debt), 81 the total of earnings and debt service for AT&T on these figures would come to $47.07 per share. 82 If the $47.07 per share total return for AT&T were then prorated according to its capital structure, $26.90 would be earned on that portion of the total capital contributed by equity, and $20.17 would be earned on the part contributed by debt. 138 For the limited purposes of analyzing the rate of return figures advanced by COMSAT (Brief for Petitioner at 35), the $26.90 figure may be taken as one measure of what AT&T did earn on the equity in its capital structure. 83 As a percent of its 1964 book value, that per share figure represents a 96.83% Rate of return, which is substantially below the 136.00% Rate of return claimed in the brief. The remaining difference between that rate of return and the 81.14% Earned by COMSAT, to the extent any direct comparison of this sort is useful, can be justified by the fact that COMSAT stock carries a high potential for capital appreciation.