BUSINESS & INVESTMENT

Many “Privilege” Securities Available on Canadian Markets

A. W. BLUE September 1 1930
BUSINESS & INVESTMENT

Many “Privilege” Securities Available on Canadian Markets

A. W. BLUE September 1 1930

Many “Privilege” Securities Available on Canadian Markets

BUSINESS & INVESTMENT

A. W. BLUE

THE number of “privilege” securities on the Canadian market has multiplied very considerably in recent years. Embraced in this category are convertible bonds and preferred stocks, participating preferreds, and warrant-bearing bonds extending to the holder the right to buy the junior securities of the company on special terms within specified time limits. Not all fixed income securities, of course, or even the majority, carry these special features, but the group is now sufficiently large to warrant careful study by investors.

The standard type of bond will pay the investor a fixed rate of interest for a I definite number of years, and at the end j of the period return in dollars the par Í value of the security. This is arranged 1 by a contract drawn up prior to the original flotation of the issue. The issuing firm may stipulate that the bonds may be redeemed in whole or in part at a fixed price, usually at 105, or five dollars above par.

This provision does not apply to all bonds. The standard preferred stock will pay a fixed rate of return, or dividend as it is usually called, throughout the life of the company, or during such periods of prosperity as permit of payment, without serious strain on the company’s resources, or necessitating the dipping into capital in order to meet the disi bursements —a practice that is not permitted by law. There is no maturity date,

' although a company may insert a clause ! in its charter authorizing it to retire its : preferred issue in whole or in part at its own convenience. As the redemption price is usually eight or ten dollars above par, the investor does not as a rule offer any serious objection when his security is retired, unless through ignorance or carelessness he has paid a price for his stock above the redemption figure. This does not often happen, however, for the callable price, except in isolated cases, usually marks the extreme upward price range of the stock.

New Investment Styles

BUT new styles have crept into the investment markets in recent years, to conform to new desires of the investing public and to cope with extraordinary financial conditions. It requires no effort to recall the common-stock boom. Many investors are still nursing wounds received in last autumn’s crash, to be reopened again with the May and June collapse. This was the sequel to the greatest speculative era in history. Under prevailing conditions of the past two or. three years, the strictly investment markets underwent all but complete eclipse. The public was buying common stocks and selling bonds and preferred stocks. Speculative

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 ol this economic waste —

“BEFORE YOU INVEST—INVESTIGATE”

profits were more to be desired than the modest but sure return of interest and dividends. Many industrial corporations took advantage of the times to replace high yield bonds and preferred stocks with common stocks. New shares were offered to shareholders on terms that appeared attractive, and stock “rights” flooded the market.

Under the circumstances it became increasingly difficult to finance through the usual agency of bonds and preferred stocks. The public did not want issues of the standard variety, which did not yield enough or did not offer any prospect of worthwhile appreciation in value. In fact, the prices of fixed-income securities declined steadily when the speculative boom was flourishing.

And so, as a matter of necessity and to facilitate marketing, many new bond and preferred issues which came on the market carried a speculative flavor skilfully devised to meet the new tastes of the times. In other words, to render securities of this type palatable, they were “sweetened”—to use a financial colloquialism--with convertible, participating and other features, which, while not detracting from the investment merits of the issues, did add a speculative quality that appealed to the public and thus facilitated their sale.

For example, a new preferred issue of Service Stations, Limited, a sound and progressive company, recently appeared on the market with a convertible feature. The offering comprised $2,000,000 of six per cent, cumulative convertible redeemable preference stock of $100 par value. According to the terms of the agreement, the preferred can be converted at any time at the option of the holder into Class A stock, two shares of Class A to be given in exchange for one $100 par share of preferred. At the moment of writing, the Class A stock is selling in the neighborhood of $40 per share and is paying dividends at the annual rate of $2.60 per share. Obviously it would not be to the advantage of the preferred shareholder to exchange at present, as he would secure for every share of preferred held, which cost him $101.50, two shares of Class A stock worth together $80, and paying gross dividends of $5.20 per year. However, the A stock sold as high as $89 a share last year, and two shares then were worth $178. The present holder of the preferred not only gets an assured return of 5.91 per cent on his capital, but he can also cherish the logical hope that when the present era of market depression has run its course—which inevitably it must sooner or later—the A stock of his company will gradually retrace the ground lost this year, and reach a point where it will pay him handsomely to exchange his present stock for the more speculative junior issue.

Page Hersey Tubes preferred was issued on a similar basis some years ago. Subsequently the common sold as high as 141, and an original investment of $100 in the preferred attained a value of $282 per share. Long before this extreme figure had been reached, however, the majority of the preferred had been exchanged for common, but, whether a holder of common or preferred, the investor still profited by the advance. Even today the common at 85 is selling at a price which represents a handsome appreciation over the original cost of the preferred. All through the period of advance the preferred kept pace with the common, preserving a price of approximately twice that of the common.

Standard Issues Held Their Own

/"VF COURSE this is an exceptional case. The convertible privilege does not as a rule work out so advantageously for the investor. Often he derives no special benefit, and it behooves him not to allow the “privilege” to blind him to the intrinsic merits of the stock, or the financial position and prospects of the company. A convertible bond of stock is usually sensitive to fluctuations in the stock market, and in a declining market can fall with startling precipitancy, until it reaches a point where its dividend acts as a supporting buffer. In the investment markets in New York it was the convertible bonds which reacted in sympathy with the weakness in stocks during the June reaction, while standard investment issues held their own, or even made headway in response to the fundamental bullish factors for bonds of easy money and declining commodity prices.

Then again advantage may be taken of the conversion privilege to obscure the less attractive features of an issue that on its own account would not be readily marketable. No doubt some inferior financing has been accomplished under this guise, and again we remind the investor that he should subject a privilege-bearing security to double scrutiny to see that it does not gloss over a doubtful investment situation, and he should assure himself that the company represented is fundamentally sound and its prospects bright before committing himself to the purchase of its bonds or stock.

An interesting adaptation of the convertible feature is incorporated in the debentures of the British American Oil Company, sold to the public earlier in the year. These debentures, which bear interest at five per cent and mature March, 1945, are convertible into common stock of the company on the following terms: Convertible at any time by applying the principal amount of the debentures in the purchase of shares at the following prices, with adjustments for interest and dividends —$25 per share to July 1, 1932; $27.50 per share to 1934; $30 to 1936; $32.50 to 1938; $37.50 to 1940; $40 thereafter until maturity. If the ordinary shares of this company repeat their record of the past this convertible feature should in time be of considerable value.

The six per cent bonds of the Beauharnois Power Corporation present an-

other feature still, namely stock-bonus warrants attached to each bond, entitling the bondholder to receive on or before October 1, 1932, a bonus of five Class A common shares for each $1,000 of bonds held. Also attached to the warrant is a non-detachable stock-purchase warrant entitling the holder to purchase between October 1, 1932, and October 1, 1937, Class B common shares at $35 per share on the basis of twenty shares for each $1,000 bond. In the event of the bond being redeemed the warrant will be detached by the trustee and will remain in force until October 1, 1937. In the event of the B stock selling above $35 per share within the allotted time, the privilege will become valuable.

The participating feature is occasionally applied to Dreferred stocks and provides that after a certain rate of dividend has been paid on common, the preferred will share equally in all further distributions above that figure. The preferred shares of The Steel Company of Canada, a seven per cent issue, participate equally with the common after dividends of seven per cent have been paid on the junior stock. Canadian Car & Foundry preferred participates with the common on a similar basis.

These are a few examples of special features carried by many Canadian securities, and it will pay the investor to familiarize himself with all the individual characteristics of the stocks or bonds he is considering as a possible purchase. If the security in itself does not possess intrinsic merit, then all the privileges in the world will not enhance its investment status, but in the case of sound, wellmanaged companies, these features have a genuine value.

Indifference May be Costly

MANY investors favor a speculative element, even in sound investment securities, although they realize that they must pay something additional for this feature. But the genuine investor is not concerned with market fluctuations. He is seeking security of income. Even he, however, cannot totally ignore market conditions, for over a period of years changes is money rates, in commodity price levels, etc., may materially alter the market value and the purchasing power of the gilt-edged bond. British Consols, for example, have fallen fifty per cent in value in the last thirty years. The war was an influence in this decline, of course; but consider the plight of the ! investor who is dependent upon the ! income from this investment, who has j seen fifty per cent of his capital fade away, and the purchasing power of the income, which has been paid to him regularly, materially reduced as a result of war inflation. This is an extreme case, and is presented merely to emphasize the point that no investor can afford to be indifferent to market and financial conditions which are subject to constant change.

Some investors favor convertible bonds as an offset to such a situation, but to safeguard themselves adequately they must select with special care.

CONVERT IBLE CANADIAN SECURITIES

F. N. Burt Blue Ribbon Acme Glove Works Acme Glove Works Canadian Bakeries Canadian Canners Can. Dredge & Dock Can. Power & Paper Inc. Cons. Sand & Gravel Copland Browing Co. Caulfield's Dairy DufTerin Paving Fraser Companies National Sewer Pipe Hamilton Cotton Great West Saddlery Guelph Carpet

Stock

pfd.

pfd.

2nd pfd.

1st pfd. pfd. pfd.

1st pfd.

2nd pfd.

2nd pfd. pfd. pfd. pfd. pfd. pfd.

1st pfd. pfd.

Class "A" pfd. pfd. pfd.

Div.

Rate

7 %

$3.00 7 %

6% 7 % 6 'A % G'/i% 6% 7% $1.00 7% 2. 50

7% 7% 7% 7% 2. 40 2.00 6 lí %

common

common

common

common

common

common

Class A

Class B

Class B

common

common

common

common

common

common

common

common

common

common

common

common

Time

1*939

1939

1*935

Basis of Conversion 1 c. for 1 pfd.

1 c. for 1 pfd.

2 c. for 1 pfd.

1 Kc. for 1 pfd.

1 c. for 1 pfd.

1 c. for 1 pfd.

1 Class A for 1 pfd.

2 Class B for 1 pfd.

2 Cl. B. for 1 B. pfd. 1 c. for 1 pfd.

3 c. for 1 pfd.

1 c. for 1 pfd.

2 }i c. for 1 pfd.

4 c. for 1 pfd.

2 c. for 1 pfd.

3 c. for 1 pfd.

1 c. for 1 pfd.

1 c. for 1 Class “A"

1 c. for 1 pfd.

3 c. for 1 pfd.

0)

(1)3 c. for 1 pfd. to 1931 ; 2 K c. for 1 pfd. to 1933; and 2 c. for 1 pfd. to 1935.

Company Harding Carpets I.angley Co.

Laura Seeord Candy Shops C. W. Lindsay C. W. Lindsay Niagara Wire Weaving Orange Crush Ltd. Pelissier's Ltd.

Power Corp. of Canada Regent: Knitting Mills Russell Motor Car H. Simon & Sons Toronto Elevators Thayers Ltd.

Tip Top tailors Whittal! Can

Stork

I'M.

pfd.

pfd.

pfd.

pfd.

pfd.

1st: pfd. pfd.

Deb. “A” pfd. pfd. pfd. pfd.

1st pfd. pfd. pfd.

Rate

into Limit Conversion

common none 2 o. for 1 pfd.

common none 2 c. for 1 pfd.

common none 3 c. for 1 pfd.

common 1929 3 c. for 1 pfd.

common 1931 2 c. for 1 pfd.

common nono I c. for 1 pfd.

common 1933 4 c. for 1 pfd.

common none 5 c. for 1 pfd.

common none ! c. for every $100 del)

common 1933 4 pfd. for 2 's pfd.

common none l c. for 1 pfd.

common none 2 c. for 1 pfd.

common none 3 c. for 1 pfd.

common 1931 3 c. for 2 pfd.

common 1933 2 c. for 1 pfd.

common 1932 3 c. for 1 pfd.

*ART1CIPATLN'C; STOCKS

Company Brantford Cordage Canada Bread St. Lawrence Paper Mills So. Can. Power B. C. Electric Can. Steamships

Steel Co. of Canada Howard Smith W. D. Beath Can. Wirebound Boxes Can. Car Foundry

Stock

1st pfd.

‘•R” pfd.

pfd.

pfd.

pfd..

pfd.

pfd.

pfd.

Class “A’ pfd.

Dividend Rate 8C

$1.75 8% $1.80 $1.50 $1.75

Terms

Equally after 1.50 on common Equally after 87 '/í c. on common Equally after $8 on common Equally after $8 and up to $7 Equally after $7 on common $1 when up to $3 is paid on common and $1 more when to $6 is paid on common; none thereafter.

Equally after $1.75 on common Equally with common from $8 to $10 Equally after $1 on common Equally after $1 on Class B Equally after $1.75 on Class B