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porary flurry, and may be overcome by mounting sales and increasing net profits. In any event, such situations are what the market investor must take into account, and what the market speculator banks on.
An American living temporarily in Paris was surprised one day to see an acquaintance, a professor at the Sorbonne, sweep up to his house in a handsome automobile. He had not supposed the Frenchman to be so prosperous, for he lived very simply. "But I did not buy a motor," said the professor when the American offered his congratulations on what he supposed to be a windfall, "until I had economized and laid aside. enough in securities to cover, not only the indebtedness I assumed on the automobile, but enough to pay in interest the upkeep as well. If anything happens to me or to the machine, my wife will be fully protected."
There was the cautious French psychology at work, the psychology which has made the nation famous for its thrift and its substantial worth. The American, pondering the fondness of his countrymen for mortgaging their future salaries under the instalment plan, was surprised and a little amused at the professor's extreme conservatism. The United States is incorrigibly optimistic, and the New York stock market reflects the national faith. Sometimes, as happened in the spring and fall of 1926, there are misgivings, and the market slumps; but by and large its tone is sanguine.
Yet the practice, now generally followed in Wall Street, of basing capitalization on earning-power, in
volves more than hopefulness; it involves a sound principle. B. M. Anderson, Jr., economist of the Chase National Bank, has illustrated the relation of earning-power, as expressed in income, to capitalization and interest rates, by the figure of a lighted candle, a disk, and the shadow the disk throws on the wall. "The disk," he says, "represents the annual income, the distance between the candle and the disk represents the rate of discount, and the shadow on the wall represents capital value. As the disk is reduced in size, the shadow grows smaller. The shadow, moreover, increases or decreases vastly more than the disk increases or decreases. A moderate change in the annual income makes a vast change in the capital value."
Now, the Wall Street investor takes into account not only earnings of the immediate past, and of years past, but prospective earnings. (If he is wise, he is cautious of average earnings, which may prove deceptive.) And any Wall Street syndicate, about to reorganize an enterprise, takes these factors into account. After the settlement of the Boxer uprising in China, for instance, shipping was drawn into the Pacific Ocean on the prospect of better trade with the Far East; and then the Boer War had the effect still further of increasing marine transportation rates in the Atlantic. Those lines engaged in transatlantic business won phenomenal profits. On the strength of their fine showing a syndicate headed by the House of Morgan undertook, a quarter of a century ago, to organize the International Mercantile Marine, known in that day as "the shipping trust."
But ocean rates are highly competitive, and the term "trust" was a misnomer. New carriers entered the Atlantic to take advantage of the high charges, and the period of prosperity was soon past. The business of operating ships upon the seven seas is unstable and uncertain at best, and the consolidation did not prosper. The incident is too far in the past to be of any market importance now. It is set down here It is set down here only as illuminating one side of the shield. When such ventures come to grief, the investing public is not the sole sacrificial goat; the promoters lose too. On the other side of the shield is the United States Steel Corporation, which began in much the same way as the International Mercantile Marine Company; its common stock represented at first an intangible hope, and sold as low as $8 a share, but now it is about the solidest thing on the Wall Street horizon.
A marked modern tendency in American industry is away from family control. The sale by the Pattersons of the National Cash Register and by the Candlers of Coca Cola are examples. Another is that of the Dodge automobile property, one of the most spectacular deals of modern times. The two Dodge brothers, who had been the informing genius of the business, died within a few months of each other; and the business was put on the market for the highest bidder. All competitors soon dropped out save two, a group headed by the Morgans and representing General Motors, and another group headed by Dillon-Read. The latter bid fourteen millions more than the
Morgan group, and paid $146,000,000 in cash for the property. The single check for that amount, signed by Clarence Dillon, was the largest ever made in a commercial transaction in this country.
The actual physical properties thus purchased were valued at fifty millions. In the refinancing, there was included seventy-five millions in debentures, the first great bond issue against an automobile property. Up to that time, the total bonded indebtedness of the industry had been about twenty-five millions; whereas the packing and steel industries were bonded, each of them, for about a billion and a half. This made the Dodge financing doubly noteworthy.
In the reorganization stock was issued which now has a market value of considerably more than a hundred millions. There were 850,000 shares of preferred stock, to carry a seven per cent dividend, which is selling as I write a little above 70; and there were authorized 2,535,000 shares of A common, of which 1,934,554 are outstanding, and are selling around 17. The A stock has no votingpower; this is carried by 500,000 shares of B common stock, which was not put on the market. The issue, which was put out last May,
oversubscribed. The selling price was $100 for a share of common plus one of preferred.
On the books of the reorganized Dodge Brothers concern, good-will is carried at one dollar. The book valuation of the preferred stock is one dollar a share, and of the A common stock ten cents a share. On the ledger, therefore, the shares of common and preferred stock which
now have a market value around $100 are listed at $1.10; and on the preferred the company agrees to pay out of its earnings $7 a year, or 700 per cent of its listed value. Bookkeeping of this sort seems to become necessary when capitalization is based on earning-power or good-will, and good-will is carried at a dollar. The Dodge company's net earnings for the first quarter of 1925 were $6,357,152; for the first quarter of 1926, $5,990,489; the first quarter of 1927 $1,545,349; it has an earned surplus of more than twenty-five millions, and still has in its treasury a large part of the A common stock. It is not necessarily an argument against the continued success of the Dodge business that it has passed out of the hands of the two men who made it and is now in the hands of Wall Street bankers. This argument is sometimes heard in such cases, and is based on the aphorism, a favorite in this country, that every business is the lengthened shadow of some man. The Ford Motor Company, for example, is the lengthened shadow of Henry Ford; but its chief competitor, General Motors, was not organized and is not now controlled by a genius of production. It is a child of Wall Street. Its board of directors includes such men as Junius S. Morgan, Jr., son of J. P. Morgan, Pierre S. du Pont, and George F. Baker, Jr.
General Motors, which has more than 45,000 stockholders, declared a stock dividend last year of fifty per cent; and at the present market this "melon" has a value of more than $450,000,000. The new stock will return dividends like the other common. The increase in capital
ization put the concern in the first rank among the industrial corporations of the world. Henry Ford cannot teach General Motors anything about high wages, nor about the economies to be effected from mass production, nor about "vertical" trusts. Since the two came into acute competition General Motors has sold about one fifth of all the cars marketed in the United States, and Mr. Ford has made what may be called concessions; that is, he is producing a high-priced car, as well as a cheap one, and he has changed the appearance of his cheap The Ford is no longer painted solely black; it has an altered radiator and a lowered chassis. No one denies Mr. Ford's genius in his field; but neither can any one deny that Wall Street management has put his genius to its trumps.
General Motors Motors makes other things beside pleasure automobiles and trucks, of course; it makes taxicabs and coaches, accessories and parts, electric refrigerators, farm lighting and power plants, washingmachines, water-pumps, and so on. It has twenty-nine major divisions; it has a pay-roll of a quarter of a billion dollars; its net profits for the first half of last year were nearly eighty-three millions (as compared with less than forty-seven millions for the first half of 1925); and it is, I repeat, a creature of Wall Street enterprise. The The tendency away from private control seems not without its justification.
Fleischmann's yeast, Burroughs adding-machines, Case threshingmachines, Listerine, the Childs restaurants, the Woolworth stores-one might fill this page with notes on the
businesses which have found their way out of one-man or one-family control into Wall Street. In the case of the Woolworth company the control was merely shared; for Goldman, Sachs & Co. and Lehman Brothers, who refinanced it, make it a general policy to require that those who built up an enterprise shall take part in their reorganizations. The Woolworth stores represent strikingly the gesture it has almost the air of swank of writing off good-will as a large item of the balance-sheet. Originally fifty million dollars, this was reduced by twenty millions in 1922, by ten millions in 1923 and again in 1922, and in 1925 to the final figure of $1.
This company, with 5300 stockholders, represents a merger of several smaller chains into the overshadowing Woolworth business. The shares are carried on the books at $25 each; the physical value back of each share is about $35. The stock was put on the market in 1912 at $55 a share; each has been split into four shares, and there has been a thirty per cent stock dividend; so that what cost $55 fourteen years ago is worth at present prices nearly $1000, practically all of which is based on earning-power-on the magic of sales, at "Nothing over ten cents in this store!"
The Woolworth sales, please note, were nearly 253 millions in 1926; in the single month of last September they were more than a million above the sales for that month in 1925. Such figures as these, not the property account, are what interests Wall Street investors; and by Wall Street investors, of course, I mean the millions whose money flows into this re
stricted and cavernous district, not merely the resident buyers. Figures such as those I have just cited have served to push the lowly five-andten-cent stores into the financial upper crust. Woolworth is one of the aristocrats of the Stock Exchange. Its shares have ranged above 200 when the going was good. The company controls 1500 stores in the United States, Canada, and Great Britain, and employs 28,000 persons.
Another chain which has gone out of private ownership is Childs, which served fifty million meals in 1925. The Childs string embraces more than one hundred restaurants, half of them in New York; they have invaded Fifth Avenue. It happens that in this case the value of realty, plants, and equipment is not far from the value of outstanding stock; more than half of the authorized common is still in the treasury. Before the refinancing, the common had a par value of $100; in 1923 it was changed to no par value, and five new shares were issued for each of the old ones. Now the new shares are selling around fifty-five dollars each. Childs had a gross income in 1926 of about twenty-seven millions, an average of about half a dollar for each meal served. It does not list goodwill.
The growth of chain systems such as these is an interesting phase of industry's effort to solve the problem of distribution. About forty-nine cents of every dollar we spend goes into that complex of transportation, insurance, rent, services, and so on which is called distribution. American business genius has been devoted to production at the cost of merchandising; but now the chain
stores, the mail-order houses, the department-stores (some of which are themselves grouped in chains), and the "company stores" are competing with the small individual shops to take the major place in retailing. In the stock market reports, a part of the struggle is reflected.
If we turn away from chain-stores, which require a comparatively large investment in "plant," we find more striking examples of the manner in which the investor ignores property account when looking at earning power. There is Listerine. It has been on the market for more than forty years, and it is like Coca Cola in that "everybody" knows it. The Lambert Pharmacal Company's physical properties are valued at a little more than a quarter of a million dollars, and its total assets are less than a million and three quarters; but the outstanding stock, based on about half its earning-power, is worth more than seventeen millions, and is selling well above the price at which it was offered to the public.
The goods labeled Listerine are made by the Lambert Pharmacal Company, and this is controlled by a holding concern, the Lambert Company; it is the latter's shares which are on the market. The Lambert Pharmacal Company has but 60,000 shares, of no par value, carried on its books at a valuation of $600,000, and the Lambert Company owns a little more than half of them. Now, the Lambert Company has an authorized issue of a million shares of no-par stock, of which 281,000 are outstanding. Nearly 200,000 shares were put on the market in March, 1926, at $41.75 each by Goldman,
Sachs & Co. and Bond & Goodwin; these were oversubscribed, and are selling as this is written above $67 a share; a gain, say, of $35 a share for those who bought at the market price at the time of issue. The explanation is to be found in earnings. The Lambert Pharmacal Company earned in 1922 $8.67 on each of its shares; in 1923, $15.75; in 1924, $23.50; in 1925, $30; and in 1926, $47. The Lambert Company, owning more than half of those shares, sprays out a part of the prosperity to the stockholding public.
All the enterprises we have been talking about, excepting the Dodge company, had their beginnings back in the eighties. The automobile industry was born at the beginning of this century; but the Childs restaurants set up in business in 1899, and the others I have mentioned even earlier. They have persisted, therefore, through more than a generation of the human span, all of them on an ascending scale of profits; and finally their prosperity has been capitalized.
Now, prosperity, particularly on a large scale, has a way of going to the head. Twenty-five-cent sugar ruined many Cuban sugar planters and caused a general financial collapse on the island. A few years of exceptionally high prices for wheat and hogs and corn brought disaster in the long run to many American farmers. Individuals are likely to become reckless or extravagant in boom periods, and they pay through the nose in the reaction. Every boom has its morning after. Corporations are less likely to be swept off their feet; there are advantages in being "soulless."