RAILROADS: Something for the Common

Most perennially disgusted group of U. S. stockholders are those who own railroad shares. Long familiar facts: a third of U. S. railroad mileage is insolvent or in the courts. Another third operates in a twilight zone halfway between receivership and solvency, periodically sparked by RFC handouts. Only the top third of U. S. rails (some of them, like the gilt-edged Union Pacific, heartbreakers to earlier generations of stockholders) pay steady dividends.

But last week, for the first time in years, U. S. investors were thinking about rail stocks once more. The reason was not the simple fact that the defense boom was catching up with the rails, upping their nine-month revenues 9% (to $3,125,855,000) over the same period of 1939. It was barely suggested by the companion fact that when rail net rises above the break-even (interest-covering) point, leverage raises it much faster than the gross. The 9% increase in gross served as a lever on which 137 of the roads hoisted their combined net 24%.

The real reason for new interest in the rails was the fact that they are peculiarly favored by the excess-profits tax. Taking 20 typical industrial stocks, the Wall Street Journal last week showed that out of every $1 by which these companies increase their profits over 1939, 72¢ will go for taxes. Not so the railroads. With enormous structures of “invested capital,” on which the return for most is nowhere near the law’s minimum 8%, they offered their common stockholders one of the longest rides in the park. Signs, good & bad:

>Best earnings news came not from a defense-plump Eastern road but from grain-carrying, often drought-beset Atchison, Topeka & Santa Fe. In August 1938 Atchison broke a 38-year precedent by failing to pay a preferred dividend. Last fortnight its common made the news. To the surprise of Wall Street dopesters who had expected nothing from its nine month’s profits of only 11¢ a share, Atchison declared its first common dividend ($1) since 1937. Conservative Atchison directors never pay common dividends unless business is good. The dividend was taken as a sign of better times.

>Also reassuring was the news that Missouri-Kansas-Texas R. R. (Katy), balancing on the insolvency fence, would pay interest this winter on its bonds. Some Katy bondholders have received nothing since 1937; its preferred stockholders since 1931 ; its common shareholders since 1930. Usually an oil-and-granger road, hit hard by the decline in crop exports. Katy recently hauled 320 carloads of lumber, seven carloads of wooden tent poles, 15 carloads of Army rubbers, 181 carloads of mattresses to Fort Sam Houston and elsewhere.

>One of the sleekest railroads in the U. S., Louisville & Nashville (coal, manufactures, fruit and vegetables) this week prepared to pay common shareholders a Christmas bonus of $2, boosting 1940 payments to $6 a share ($5 in 1939). Principal beneficiary: volatile, reduced Atlantic Coast Line, 51% owner of L. & N.

>Just to remind the public that railroads were still railroads, Maine’s potato-carrying Bangor & Aroostook fell from grace last week, passed its dividend for the first time since 1904.

>Last week B. & O. boss, 79-year-old Uncle Dan Willard asked his directors for the tenth year in a row to be replaced by a younger man. They told him that he was their “indispensable man,” drafted him for his 32nd term.

>Lionel Corp. (toy trains) declared a 25¢ extra dividend, inspired Scripps-Howard Cartoonist Will Johnstone to suggest a way for bankrupt roads to get back in the money.