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

Heading: The Expectations of Investors

Text: 139 The comparison with AT&T, therefore, does not demonstrate that COMSAT's rate of return has fallen short of what is just and reasonable. COMSAT's complaint was more general, however. It asserted that the original subscribers of COMSAT stock were being denied the right ever to make a fair rate of return on their investment. The Commission has prescribed rates only for the future; the revenues COMSAT received from 1964 to 1973 were left unadjusted and COMSAT's plea to capitalize the difference between those actual revenues and its conception of adequate revenues was turned down. Hence, no matter what AT&T was making, COMSAT equity investors who subscribed in 1964 are, in COMSAT's view, being compelled to accept 6.45% Per annum as the only rate of return they are to receive for their investment from 1964 to 1973. 140 Because COMSAT has been regulated from its inception, it is argued that it should be an exception to the accepted law that earnings shortfalls during the formative years are not to be capitalized. That argument is a familiar one; it is simply the same assertion that a regulated company is entitled to some minimum rate of return. The most compelling aspect of that argument in this setting is that Congress intended COMSAT to become a prosperous company, and that it expected investors to view it as a sufficiently profitable prospect so as to merit their capital. 141 All of this may well be true. The conclusion that COMSAT urges follows from it, however, is not. COMSAT looks at the 6.45% Rate of return and infers that no investor would have committed funds for that small reward. But the 6.45% Figure was calculated only from increase in book value and dividends paid. It did not consider the appreciation of an investor's capital from a rise in the price of COMSAT stock. It is hardly necessary to state the financial fact that stocks most often sell at multiples of the book value per share of the company. The difference represents investor confidence in the likelihood of appreciation of the stock itself. And it is for this reason, in many cases even more than the hope of dividends (and certainly more than the simple expectation of increase in book value), that the public invests. 142 COMSAT makes much of the public relations strategy used to induce investment in COMSAT in 1964: buy it at the start, put it away, and let your grandchildren benefit. Undoubtedly the prospect of getting in at the ground-level on a government-sanctioned monopoly was attractive, but the logic underlying that attraction was that the price of the stock would appreciate as global telecommunications increasingly came to depend upon the use of satellites, and as the day of COMSAT's self-sufficiency approached. This is not to say that the entire appreciation in stock price was unrelated to the underlying appreciation in book value or the rates COMSAT was permitted to charge its customers, but it is important to recognize the speculative aspect of an investment in COMSAT. 143 This aspect of a decision to invest in COMSAT was clearly stated by Commissioner Robinson in his separate opinion: 144 Thus, if the start-up period is expected to last five years and once out of that period Comsat is expected to earn $10 a year for eternity then investors will be willing to pay the value of stock earning an annuity of $10 a year with payments to begin in five years. Such a stock is worth less than a stock of a company earning $10 a year right now but it is not valueless. A rational investor would buy Comsat even if he never expected a cent of return deficiencies to be allowed. Nothing the Commission has ever done, and nothing in the history of rate regulation generally would lead reasonable investors to expect that Comsat would be permitted to make up any earnings shortfall particularly one defined as a return falling short of 12 percent by a special component in the rate base or in the rate of return. 145 (J.A. 93-94; 56 FCC2d at 1193-94) (emphasis added). 146 Initial subscribers of COMSAT stock were not all looking to the allowed rates that COMSAT charged to provide dividends and increased book value as a return on their investment. The expectation of speculative gain must also be recognized. The actual fluctuation in COMSAT stock provides all the proof needed that there was much opportunity for the early investor to make his speculative profit. In June of 1964, ten million shares of COMSAT were first offered to the investing public and common carriers at $20 per share. It has never fallen below $20 since. 84 Over the course of the last thirteen years, the stock price has varied widely, reaching a high of 84 1/2. 85 In the last two years, it has stayed within the range of 23 7/8 and 37 3/8. 86 147 The hope for appreciation of stock price is an aspect of investor behavior that COMSAT's argument to this court entirely ignores. And it is in light of that aspect that we may conclude both that the rate of return to be afforded COMSAT will not scare off investment, and that the historical return enjoyed by COMSAT stockholders was adequate to attract necessary capital, and fairly compensate investors for the risks they have assumed 87 in investing in an enterprise having the capital appreciation potential of COMSAT. 148 We have given careful consideration to all the many contentions raised by the petitioner, and any of those matters not specifically addressed in this opinion have been deemed insubstantial. The case is remanded to the Commission for further proceedings as directed by this opinion. 149 So ordered.