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A. •¿-
The Railroad Question in Kansas
from the Investoi>-$fejndpoint.
By
EDWARD D. KENNA.
The Railroad Question in Kansas from
the Investor's Standpoint.
ON no conceivable subject, has there been such mis¬
representation; so many false statements, either
in willful defiance of known facts or else in ignorance
of that which could be easily ascertained; such con¬
stant and mendacious efforts to deceive and mislead;
so much said by men who knew nothing of the subject
and so little said by men who were-informed—as upon
the income derived from investments in western rail¬
road securities.
For years it has been the fashion to charge that the
railroad companies of the west were paying dividends
and interest on watered capital. These charges, put
forth perennially, and permitted to go unchallenged
and unanswered, are now cited to justify threatened
legislative action that would amount to confiscation.
The simple truth is, that no class of property has
yielded so little return, for the actual cash invested in
it, as the railroads of the south-west; and that no class
of investors have suffered as greatly as the men who
furnished the money to construct the railroads of the
western and south-western states.
It is true, that every railroad company operating in
Kansas has a large amount of stock outstanding; but,
with a single exception, no Kansas railroad corporation
has paid a dividend of any kind for many years. The
exception is the Rock Island, whose profitable lines in
other states have enabled it to declare a dividend of
from
2
two per cent., no portion of which was earned from its
possessions in Kansas.
Neither is it true, despite frequent assertions to the
contrary, that the amount paid in interest by the Kan¬
sas Railroad Companies is equal to a fair return on the
actual cash invested in the railroads, or on what it
"would now cost to replace them.
During the past year the Atchison Company paid
no dividends whatever, and paid, in interest on
its bonded debt, a sum that is only equivalent to
$704.70 per mile of its railroad, which is six per cent,
on $11,745 per mile; so that the total payments, made
by the largest railroad system in the state, to its secu¬
rity holders of every class, equalled less than six per
cent, on $12,000 per mile of railroad; and, it should be
borne in mind, the company owning this system has
bridged nearly every large stream on the continent,
and has spent millions in tunneling mountains, reducing
grades, acquiring terminals in large cities, and so im¬
proving its railroad as to make its operation economical
and safe.
If we take the case of the Rock Island, the only
corporation in the state that declared a dividend, we
find that the total amount paid by it during the past
year in dividends was $923,116, and that the total
amount paid by it as interest on its bonded debt was
$3,322,175, or $4,245,291 in all. If we divide this total
by the mileage of the system, we ascertain that the
total amount paid is just equivalent to six per cent, in¬
terest on $23,200 a mile. This, then, was the total re¬
turn paid to the security holders, stockholders as well
as bondholders, of the most prosperous road in Kansas,
and one of the most prosperous roads in the entire west;
3
a road that, through the most populous state in the
west, has a double track; a road that, in point of loca¬
tion, management and everything else that tends to
prosperity in railroading, is excelled by few.
The investors in the securities of the Union Pacific
have for many years received neither interest nor divi¬
dends.
In the face of these figures, how absurd the state¬
ment that the railroads are paying dividends and in¬
terest on watered stock! And equally absurd and
untrue, is the statement, made with the same frequency,
that the persons who made the original investment in
railroad securities, and were "let in on the ground floor,"
so to speak, have reaped a'rich reward in return for
their investments.' The men who invested their money
in the railroads of Kansas have lost heavily. This
is true whether they bought their securities on the
open market, or took them under what, at the time,
was supposed to be the most favorable opportunities,
viz;—under subscriptions offered only to stockholders.
The extensive systems in Kansas are the Union Pa¬
cific, Missouri Pacific, Rock Island and Atchison. The
prices of the stocks of the companies owning these lines
on January 3, 1887, and on January 2, 1897, were, re¬
spectively, as follows:
Jan. 3, 1887. Jan. 2, 1897.
Union Pacific...
Rock Island....
Missouri Pacific
Atchison*
$37,210,000 $ 5,795,000
58,156,308 30,462,828
59,468,750 11,068,750
98,175,000 4,207,500**
$253,010,058 $51,534,078
■"Common only.
■"■" After deducting the $10,000,000 paid by Atchison stockholders as an as¬
sessment under the Eeorganization Plan of 1895.
4
from which it is readily seen that the difference be¬
tween what these stocks could have been sold for in 1887,
and in 1897 is $201,475,980, which represents the loss in
the market value of these securities, sustained by their
owners during the past ten years; but this loss is not
the only one the stockholders have sustained, for, ex¬
cept in the case of the Rock Island, no dividends have
been paid for many years. The market value of the
securities has shrunk seventy-five per cent, and there
has been absolutely no income for years on what, in
1887, was worth $194,853,750, and is now worth but $21,-
061,250. (Union Pacific, Missouri Pacific and Atchison
stock.)
At this juncture, it is to be expected that some one will
remark " these stocks were watered"; but this is not a
satisfactory answer to the investor, who, in good faith,
bought these securities, nor is it the truth. That some
of this stock may have been given prior to 1880, as a
bonus to induce parties to buy bonds which were at the
time of doubtful value, and otherwise could not have
been sold, that some of it may have been given to in¬
duce a reduction in interest charges, that some of it
may have been given in purchase of lines that did not
afterwards prove profitable, I must admit; but that any
was ever issued in the case of the company with whose
history I am most familiar, except under circumstances
that were at the time considered necessary or proper,
I most emphatically deny.
We have seen how the person fared who bought
stock in the market. Let us see how he fared, who
bought it of the company, and, in this investigation, I
can only speak from knowledge concerning stock of the
old Atchison Company. On May 26, 1879, that com-
5
pany offered to its stockholders, and they subscribed
for, at par, $2,079,900 of stock ; on July 7, 1880, under
the same circumstances, $2,242,400 was offered and
taken ; on January 3, 1881, $6,267,400 ; October 7, 1881,
$4,712,700, and on January 30, 1887, $10,096,750. A
share of this stock, for which these subscribers paid
$100 and on which they have since paid an assessment
of $10, making its total cost to them $110 per share, is
now worth in the market but $14.25, and, for eight
years, no dividend has been received by its owner.
But question may be asked concerning stock given in
exchange for the purchase of other railroads. Regard¬
ing this, I only know as to the most considerable pur¬
chase, that of the St. Louis and San Francisco Rail¬
way. The stock of the company owning that line con¬
sisted of preferred and common ; the former was, at the
time of the purchase, worth in the market (May, 1890)
about $65 per share and the latter about $34 per share.
At this time the owners of " Frisco " stock could have
sold it on the market -for cash at the prices I have
named, but they preferred to exchange it for Atchison
stock, taking the latter at its market value in payment
for their stock at its market value. It is obvious to any
one, that the persons who exchanged their "Frisco"
for Atchison stock have lost heavily. On the shares
of stock which they could have sold in 1890 at
$65 and $34 per share, respectively, no dividends have
ever been declared, and, on each share, they have been
required to pay an assessment of $10, making the
present cost to them $75-and $44 per share, respect¬
ively, of what can now be sold for only $14.25 per
share.
But some one says : " Is it not true that the Atchison
6
Company once declared a stock dividend?" It is. And
it is likewise true that the par value of such stock is not
equal to two per centum on the capital stock during the
years it has paid no dividends. This was thought to be
a magnificent dividend, in the year it was declared, but
it has proved of but little benefit and is a sorry recom¬
pense for the many years that the stockholder has gone
without dividends of any kind.
" But how about the man who received a bonus away
back in the seventies and who, in exchange for a cer¬
tain amount of money, received both stock and bonds?"
Undoubtedly, he was the most favored of all, and he
doubtless thought he was getting a very good thing ;
but, if he held on to his purchase, as a great many did,
he now knows that it would have been much better for
him to have accepted the hazards and risks of any
other investment, no matter how unpromising it may
have seemed.
Perhaps the most favorable offer ever made to the
stockholders of the Atchison was that of March 22,
1872, by the terms of which, for each $1,000, the sub¬
scriber received $800 in a first mortgage bond, $500 in
a land grant bond and $1,000 in stock. The par value
of these securities was $2,300, but it will not be forgot¬
ten that, in 1872, money for Kansas investments, at any
rate of interest, was scarce.
In 1889, the Atchison found it could not earn its in¬
terest. The bondholders voluntarily, without forelos-
ure, accepted what was known ^as the "Atchison Reor¬
ganization Plan of 1889." Under the terms of that
plan, the subscriber we have mentioned received the
following securities, viz:
For his $800 ist Mortgage 7% Bond, $880 in 4%
Bonds and $416 in income 5% Bonds.
7
For his $500 Land Grant 5% Bond, $500 in 4% Bonds
and $300 in Income 5% Bonds; or, in all, $1,390 in 4%
bonds, with a fixed interest of $55.20 per annum,
and $716.00 of Incomes, with a contingent inter¬
est of $35.80, if earned. His $1,000 of stock was not
affected.
It will be observed that, while under the above plan
the capitalization of the road was increased, the
amount of interest which it was required to pay was re¬
duced and the total payable, under any circumstances,
was not increased, an arrangement beneficial alike to
the railroad company and the farmer, as it enabled the
former to meet the interest charges in hard times,
without raising rates. But the tribulations of the sub¬
scriber were not over. The panic of 1893 came and
with it the Atchison receivership. He then had:
$1,380 in 4% Bonds,
716 in 5% Income Bonds, and
1,000 in stock.
He went without interest on all his bonds until 1896,
when, upon the further payment of $128.64 (making
his present cash investment $1,128.64), he received in
the securities of the new company, the following:
$1,033 ist Mortgage 4% Bonds,
552 " Income 4% Bonds
809 " Preferred Stock, and
1,000 " Common Stock.
The first mortgage bonds only are earning interest,
so that his present entire annual income from an in¬
vestment of $1,128.64 in cash is (4% on $1,035) $4140,
or about 3>^%. But this investor was an exceptionally
favored one. Let us see what became of those who
followed him.
8
In 1886, the construction of the Chicago, Kansas and
Western was decided upon, and the Atchison offei'ed its
stockholders (not the public), the following securities,
viz : $1,000 in 5% bonds and $500 in income bonds for
each $1,000 subscribed. The offer was eagerly taken,
to the subsequent sorrow of the subscriber. After two
reorganizations and after paying $22.40 in assessments,
the subscriber of 1886 has the following securities only
to show for his investment of $1,022.40, viz:
$412.50 in 4% bonds,
220.00 in income 4% bonds, and
572.10 in preferred stock,
the total income on which to-day is $16.50 per annum,
or less than 1?^% on his original cash investment.
It may be urged by some one that the misfortunes
of the bondholders have been due to the fact that the
railroads are required to pay interest upon an excessive
bonded debt. We have seen what the amount of inter¬
est actually paid is equivalent to, on the basis of a debt
funded at 6%, but, as the bonds actually draw a less rate
of interest (4% and 5% in most cases), the exact bonded
debt per mile may prove interesting.
The average bonded debt of the Atchison Company,
on which it is now paying interest, is '$16,690 per mile.
It is true that it has outstanding, income bonds, exceed¬
ing the amount named above, equal to $7,805 per mile,
but, by their terms, interest is not required to be paid on
these bonds unless earned, and it is not paid because it
is not being earned.
The average bonded debt of the Rock Island is
$21,769 per mile, while the average bonded debt of the
Missouri Pacific, in Kansas, is $16,235, and for the entire
system but $25,637 per mile.
9
Such has been the fortune of the men who furnished
the money with which the railroads of Kansas were
built ; the men who made possible the marvelous de¬
velopment of that most magnificent of the newer states.
Some of them are at present receiving no income on
their investments ; none of them are receiving more
than a small rate of interest.
i
Whether the people of Kansas, in retaliation for
fancied wrongs, will confiscate the property of these in¬
vestors, or whether they will be allowed to retain their
present meager return, is for the legislature of that
state to determine.