Railway Preferred And Deferred Ordinary Stock

Railways also issue (besides ordinary stock in the usual form) a part of the ordinary stock in the divided form of Preferred and Deferred, the former receiving a fixed rate of interest, the latter a variable rate of dividend in accordance with the net revenue realised during each year. It is obvious that the Preferred Stock is likely to be the more stable in value, since whatever be the net earnings, it receives (after payment of the interest on the different classes of prior issues) a stated return, while the Deferred (and the Unconverted Ordinary) are the subjects of continual speculative transactions, determined in value by the dividend prospects and anticipated results of the working of the line, as dependent upon the absence or imminence of strikes, the activity or depression of trade (and, consequently, of the amount of goods and materials to be carried), the state of the weather for light or heavy traffic (that is, for the carriage of passengers or goods), the cost of coal, the condition of wages, the need of repairs and renewals, the damages for casualties by collision, the wisdom or recklessness of capital extensions, the possibilities (which will operate upon all the obligations of a railway, but with special force upon the ordinary capital) of effective electric traction, and many other elements.

The investor thus perceives the various orders of security from which he may select; practically speaking - that is to say, regarding the risks which are incident to all enterprises and ventures, - the higher-ranking Preference Stocks are equivalent in security to the Debenture Capital, which yields a lower rate of return: if he require the soundest security he will choose Debenture obligations, but he cannot wander astray if he select with their more remunerative income the kind of Preference Stocks to which I have referred in the principal Lines; while he is advised, for the reasons I have assigned, to abstain from ordinary stocks, and abandon them to the investor with a speculative tendency, or to prudent capitalists who, possessing such ample means that any investment in these fluctuating securities bears but a moderate proportion to their entire resources, can afford to sustain the recurrent changes to which such securities are continually liable.

Difference Between Interest And Dividend

The present place appears to be as fitting an opportunity as any to mention an error common among investors, and the remarks submitted apply generally. The source of numberless mistakes in judgment and action (founded as they should be on exactness of knowledge) consists of terms improperly employed. Precision of language is correlative with accuracy of thought, and accuracy of thought finds its expression in correctness of judgment. Thus, the term "interest" 1 should be restricted to any return on capital which is of a fixed quantity, as, for example, the interest upon Debenture Stock, and upon an advance on mortgage; while the term "dividend" 2 should apply to any return which is of a variable amount (or ratio); thus the ordinary stock of a railway participates in the surplus revenue which remains after the interest on the prior obligations (possessing a superiority of secured position) has been satisfied; and hence, as this surplus varies from half-year to half-year (with the financial working of the line), the amount (per share) distributed to the ordinary capital is not uniform; it is accordingly rightly named "dividend," or that which remains to be divided. In the same manner the word "dividend" should be used for the return received upon the ordinary capital of a commercial company. I remember that a corporation once held some of the obligation of a foreign railway (corresponding to our Debenture Stock) with a fixed rate of interest. A friend of the corporation obtained authentic information that, at its ensuing account, the railway would be unable to pay any dividend. But the friend in question entertained the customary confused notion that the terms "interest" and "dividend" were synonymous, and he consequently advised the corporation that the interest would fail to be paid. The corporation accordingly sold at once and suffered a loss, as the time was not opportune for sales; and the "interest" was subsequently paid with punctuality by the company. Had the friend been careful in his employment of words the loss would have been converted into a profit.

1 Interest: profit, advantage; apparently a substantive use of the Latin interest, it matters, it concerns, it is profitable. The word embodies the relation of being objectively concerned in something, by having a right or title to, a claim upon, or a share in money paid for the use of money lent. The remuneration given for the use of capital.

2 Dividend: Latin dividendum, that which is to be divided, from dividere, to cut into two or more parts. Consequently each share depends upon the total to be distributed, and the number of shares into which it has to be parted.

As an inquiry of interest, I have been at some trouble to ascertain the order of priority of security upon the net revenue of some of our leading Railways, and the information is appended: -

Where the company works other lines on lease, the rent for the lease ranks next after the lessees' Debenture Stock.

5th position, Consolidated Ordinary Stock. The rank of the rent of the leased lines depends upon the terms of the leases.

The rent for leased lines ranks, as a rule, after the company's Debenture Stock.

The rent of leased lines ranks before the Debenture Stock interest.

I repeat a remark - of general application - which I have already submitted. A security, though ranking in order of charge upon an undertaking subsequently to another security in that undertaking may be as acceptable as the latter for all practical purposes; and by "practical purposes " I mean as to the safety of the principal, and the certainty of the punctual payment of the interest. In some securities l - though not frequently - it is possible to possess a surplusage of margin - a range of security which is needless for the reasonable requirements of practice, and for which accordingly it is not worth while paying in the form of the higher price.

8. Railways other than those in the United Kingdom. This section includes the undertakings in foreign countries, in America, in the Colonies, and in India.