Is the Public Turning to Common Stocks for Investment?
A. W. BLUEApril151930
Is the Public Turning to Common Stocks for Investment?
BUSINESS & INVESTMENTS
A. W. BLUE
ONE hears a good deal of talk these days about a new era in finance, in which bonds and other first-rate investment issues will play the dominant rôles, while common stocks long in the spotlight will occupy a conspicuously subordinate and backstage position.
There is plenty of logical argument in support of such a theory, and we have only to recall the disheartening experience of the public with common stock investments during the October-November stock market debacle, to present a case for bonds, that from its surface aspects at least is all but impregnable; and if one were to attempt to visualize the disappointments and the huge financial losses entailed, one would only he piling up additional and superfluous evidence of an obvious situation. But like a good many theories there is still, even several months after the events above referred to, a lack of a sufficiency of undisputed and supporting evidence to enable us to render a verdict.
As far as can be ascertained at present, the public continues overwhelmingly stock-minded. There has been some switching into bonds, it is true, but not yet in the proportions anticipated earlier. The stock market has failed to measure up to the ambitions of its supporters, but I for that matter the bond market has i been disappointing as well. An active and buoyant bond market, largely supported by erstwhile and now disgruntled traders in stocks, had been predicted, but. i after an early splurge the gilt-edged : market has settled back into a rut, and in j common with the stock market appears to be waiting some constructive stimulus which has not yet appeared.
And this brings us down to our subject of stocks versus bonds, for it is all important that the investor should have a clear comprehension of both sides of the investment picture, if he is to make the most of present day opportunities. If the public is definitely through with common stocks, for a period of some years at least, then it behooves the investor to concentrate entirely on bonds; but if there is a reasonable likelihood that the stock market will come back, then it becomes his duty to pick out a few sound and seasoned equities to add to his investment list. One financial writer has suggested that the man who buys solely for immediate income is buying stupidly; but the man who does not buy for eventual income is more stupid still.
People are now asking themselves whether or not it was a mistake ever to have considered common stocks as investment rather than outright speculation. The principal earmark of an investment is safe and steady income, and therefore it is not unnatural that such questionings should be raised after the
Hundreds of thousands of dollars are lost annually In Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist In the reduction and elimination of this economic waste —
"BEFORE YOU INVEST—INVESTIGATE”
unhappyexperiences of last autumn.
During the past year it was a common saying that everybody was “up to his neck” in stocks. It is undoubtedly true that more people than ever before were heavily involved in the market, and naturally took heavy paper losses. But it is equally true that there were thousands of large investors who had pulled out of the market two or three years ago, believing at that time that prices were too high to last; who were buyers on the break, and were selling bonds in order to finance their stock purchases. A large new clientèle came into the market with autumn declines, and became a steadying and rallying force.
Stocks as Dividend Earners
'T'HIS new, or rather reconverted, type of speculator had watched the dizzy ascent of stock values, and became impressed with the possibilities for profit as well as income that this particular type of security presented, and thus was ready to commit himself in a substantial way, when prices were again adjusted to levels that seemed within the bounds of reason. It is a frequent criticism of common stocks that their yield varies widely and cannot be depended upon. This may have been perfectly true some years ago, but today dividends no longer fluctuate broadly between periods of good and bad ! times. The average well-managed corporation will declare a dividend which it can maintain, and the cutting or passing of a dividend is as much a matter of regret to the management as it is to the shareholder, as such action is commonly accepted as a reflection of inefficiency. And so with the majority of soundly established companies it is reasonable to look for a continuation of current dividend rates, with fairly regular increases from time to time. Of course, special situations occasionally develop within individual industries, and the investor should always be on the alert to catch the storm signals in order to protect himself. For few if any stocks are of the “strongbox” variety. In other words, they cannot be put away and forgotten. Eternal vigilance is the price of safety in investment.
The severest reaction in financial history carried the average of common stock values in Canada and the United States back to the levels prevailing early in 1928. Prices two years ago were considered high. Anybody who bought stocks prior to 1928 and carried them through to the present would probably be able to sell out at a handsome profit over their original purchase price. Moreover, the chances are that dividends have been raised from the rates payable when the purchase was originally made. There are many glowing examples of handsome stock market profits today, even after providing full
allowance for the recessions of last autumni This does not universally apply, of course. Some stocks are selling lower than two years ago, and there are others which were ignored throughout the bull market, and pursued a steadily declining course. Such stocks were suffering from unsatisfactory conditions within the industry which they represented, and their action consequently lends further emphasis to the necessity for careful examination of a security and of the prospects for the industry, both before and after purchase has been made.
It is probable that the average investor, in Canada at least, still regards common stocks as speculative vehicles onlyr ' He buys only to sell again when the'security has advanced in order to take the profit, or when it declines to guard against further loss. He seldom buys for an indefinite hold. And yet the record of the stocks of several companies reflects the potential profit possibilities of common stock investments.
Recent Financial History
"pXAMINATION of the past record of ■*-' several leading Canadian common stocks clearly indicates the possibilities for profits in issues of this character over a term of years'when properly selected.
British American Oil is a stock which in the past few years has realized marked appreciation in value. The shareholder who bought thirty shares of the stock in 1924, and held until today, would have established a foundation for a worthwhile investment account. The thirty shares originally cost $997.50. With subsequent participation in rights offered from time to time, at a cost of $587.50, and periodic split-ups in the stock, the latest being a four-for-one division, the original thirty shares would have grown to 173 shares with a market value of approximately $7,000. This value is practically five times as much as the total cost of the shares, which was $1,585. In addition, dividends and bonus payments have amounted to $915.95, or practically as much as the initial purchase involved.
The common shares of Montreal Power have had an even more inspiring record. Ten shares of stock purchased in 1918 at $88.50 per share represented an outlay of $885. Today the ten shares have increased to thirty shares through subsequent split-ups, with an approximate market valuation of $3,750. The capital appreciation totalled over $2,800, and in addition the shareholder received $700 in dividends and a further sum of $500, being the proceeds from the retirement of the preferred stock in 1926. The present value of the investment including dividends and return of capital is over $4,000 as against the original outlay of $885.
Shawinigan Water and Power Company has also shown progressive improvement in value. In 1912, 100 shares of stock cost the investor $12,200. Present holdings, if full advantage had been taken of rights and other privileges, would amount to 1,309 shares, worth at the current market price of $75 a share $98,000. Total funds invested, including rights, amount to $45,395. Dividends during the period total $20,536. Present value of the holdings is $98,175, which, with the dividends, approximates $130,000, leaving the shareholder a profit of around $84,000.
If past history can be taken as an index of future growth the securities of the leading members of the Canadian power industry are worthy of consideration and study by investors.
Many other Canadian stocks have made substantial market headway in the post-war period. International Nickel sold as low as $32.50 in 1926. Early last year this stock attained a record high of $420. The stock was split six for one, and the new selling at $30 represents an equivalent value for the old of $228. Despite the marked recession from the high point the original shareholder still retains handsome profits. Consolidated Mining and Smelting Company’s shares
sold as low as $13.50 in 1921 and as high as $570 in 1929. The present market is in the neighborhood of $240. Brazilian Traction registered a low of $19.75 in the 1921 bear market and sold up to $234.50 in 1927. In the following year the shares were divided on a four-for-one basis and the shareholders were privileged to buy one new share of stock on the basis of one new sharfe for every five old ones held at $50 a share. In 1928 the old sold up to $257 and the new to $78, equivalent to $312 for the old. In the following year, this record was improved with a high for the new of $81.50, or $336 for the old. The current price of $37 represents a price of $148 for the old stock.
Other issues which have shown a corresponding scale of appreciation in recent year > Canada Bread Common, City Dairy L ommon, Canadian General Electric Common, Canada Cement Common (old stock) Goodyear Common, Ogilvie Milling Common and Massey Harris Common.
Present halting tendencies in the financial markets of the country are a reflection of one or two unusual features of our economic situation, notably, the tie-up and acute depression in wheat. The record of Canadian industry is one of progress, however, and in view of Canada’s strategical position with respect to several basic commodities, such as timber and newsprint, nickel, power, coal, and even wheat itself, and our preferred position within the empire, a continuation of the upward trend of the Dominion’s economic curve is inevitable, once present difficulties are ironed out.
“Steady and Safe”
AND so, despite the fact that bonds * *■ may be in the ascendancy for a period, there is still a vast, although more or less latent, interest in common stocks, which will become active when the proper time comes. Investors looking for long hold possibilities in this field, will have plenty of time and opportunity to pick and choose. Dividend payers should have first consideration, but a high dividend yield is not always a measure of the soundness or desirability of a stock. Often a high yield indicates a condition of bad health, which should be avoided.
Stocks which persistently sell above the “rule of thumb” six per cent yield are more likely to work out to the advantage of the investor than the stock which yields a higher return and looks cheap. Certain stocks consistently sell high, and return a correspondingly low yield, because of consistency of earnings. The utility stocks are a case in point. And low yields may eventually become high yields through periodic increases, and higher dividends mean capital appreciation as well.
The small investor, however, who cannot afford to assume the inherent element of risk would do well to stick to bonds, subjecting there, too, to the most rigid scrutiny.
There are certain attributes pertaining to a stock or the industry it represents before an issue can qualify for the inner investment circle, and these are such basic considerations as essential industry, sound management, long record of earnings and dividends, large reserves and surplus, and a high ratio of working capital. The investor should satisfy himself on every one of these points, and j if he selects wisely should have no cause j for regret in the years to come.
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