SHOULD railroad storks he bought at present prices (August 5)? If the answer is in the affirmative, another question follows logically: ‘How much higher can one reasonably pay for them?'
An examination of the course of railroad earnings, and of the dividend prospects of these stocks, leads clearly to the conclusion that they should be bought at present. The Class I railroads will earn $900,000,000 for dividends and surplus this year. This is after all expenses, taxes, and interest have been deducted. Included in these expenses will be a provision of over $250,000,000 for depreciation.
The total dividends paid by these corporations last year amounted to $428,000,000. This was out of earnings available for this purpose amounting to $792,000,000.
During the three years which ended with 1928, earnings available for dividends had averaged $758,000,000; and for the three which end with this present year they will approximate $790,000,000.
It is clear that these companies will pay out in the near future much larger dividends than they are now paying. Last year they distributed only 56 per cent of their earnings, while the combined corporations of all industries in the United States distributed more than 70 per cent. If the railroads were to pay out that proportion, even of their average earnings of three years, it would mean an increase of one third in their dividends.
This is probably what will happen within the next five years. During the pre-war period the roads normally paid out a little more than 75 per cent of earnings, despite the fact that their depreciation charges were much less than now. They will doubtless return to about that percentage during the coming years. So that the future should bring a higher percentage distribution of increasing railroad earnings.
Not only is the prospect for increased dividends through more liberal distribution a favorable one. The outlook for growth in earnings is likewise good.
There has been so much pessimistic talk about the railroad stocks during the last few years that the financial progress of the industry has been largely overlooked. It needs only the actual figures of earnings to prove that this progress has been striking. The net earnings of Class I railways available for dividends and surplus have been since 1922 as indicated in the following table. The cash distributions are also shown.
|Year||Net Earnings (in millions)||Dividends (in millions)|
Certainly this is an excellent record. And it has been accomplished by improvements in operating efficiency and not by a rapid growth in traffic such as the railroads enjoyed in that upswing of earnings which followed upon the revival of 1898.
In the seven years which followed the outbreak of the Spanish-American War the gross revenues of the carriers rose from $1,247,000,000 in 1898 to $2,082,000,000 in 1905. Their net income went from 147 million dollars to 364 million.
During these last seven years the gross revenues have grown less than 20 per cent, Yet the net income multiplied practically in the same ratio as during that earlier period.
It is interesting to recall what happened to dividends during that earlier period. They had reached 100 million dollars in only a single year previons to the depression of 1894. They exceeded that figure slightly in 1893. By 1898 they had reached 90 million dollars. During the next seven years they grew steadily until in 1905 they stood at 237 million. This was almost two and one-half times the amount paid in 1893.
Nor did the growth of dividends cease with 1905. It continued until, in 1910 to 1914 these payments averaged four times those of 1898.
The moderate growth of gross revenue during the last seven years has not been due to lack of industrial production. Its cause has been the competition of the automotive vehicle, in the transportation of both freight and passengers.
The inroads of this new mode of transportation have been abnormally rapid during this period of motorization and road building. But the relative importance of this form of competition is likely to be less rather than greater in years to come. Much of the traffic, especially the less-thanearload business, is well lost to the roads. For with the increasing wages of labor, and with the increasing cost of terminal construction and operation, the business was probably carried at a loss.
Technical improvements in the railroad industry are going on at a rapid rate. We stand at the beginning of another period of outstanding improvements in locomotive construction; and central dispatching is a revolutionary change which will reduce both expenses and necessary capital investment .
It is a modest prediction that within the next decade the dividend payments of our railroads will be twice as large as they were in 1928. Thus far the disastrous experience of the war years, with their inflation and government operation, has held them at a low level. They have only just passed the high point of $397,000,000 which they had attained in the pre-war years. With growing business, and with the consolidations which are sure to take place during the next few years, they will enjoy rising earnings; and their stockholders will receive dividends which will make present prices for railroad securities seem low as one looks back upon them. In fact, prices 25 percent higher than those now prevailing for good-dividend-paying rails will seem reasonable.