4. Financial structure.—With such fluctuations it is only the most favorably situated industries that are sufficiently safe from hazard to deserve the invest ment of a bond holder. Whereas, in railway prac tice, over 60 per cent of the capital is represented by bonds, among industrials only about 33 per cent is so represented.
The first industrial bonds made their appearance twenty-five years ago, but they secured slight atten tion .until the consolidations of the decade 1895-1905. These brought large properties under capable man agement, enlisted the attention of financial experts in their construction, and created issues large enough to warrant attempts to open a new subdivision of the security market. There is still a question as to whether industrial concerns can properly issue bonds. Considering how recent has been the organization of the issuing corporations and considering also how fre quently the information, which is essential to invest ment as contrasted with speculation, is absent, it can be said, at all events, that bonds should not be over 30 to 40 per cent of the total value of the assets. Bonds and preferred stocks together may be said to occupy the position which is occupied by bonds alone in the railway and public utility fields.
The preferred stock is the characteristic security of industrial finance. In the same way that stocks serve as a cushion for bonds, so common stock serves as a cushion for preferred stock. It can easily be shown from the tabulation on page 223 that the re siliency of the cushion is tested to the extreme.
Of the companies here named, three (Nos. 1, 2, and 10) paid 6 per cent on the preferred stock thruout the period, while six (Nos. 3, 4, 5, 6, 7 and 11) paid 7 per cent. One company, Sears, Roebuck & Com pany paid 1% per cent in 1906 and 7 per cent there after. The Republic Iron and Steel Company has paid a dividend each year which has varied from 1% per cent to 14% per cent during this period.
The classification of capital claims into preferred and common stocks operates excellently. The former, with its reasonably regular return, appeals to those who can take some risk but who desire regu lar income, while the common stock bears all the irregularities of trade and is appropriate for the hold Where obsolescence and inadequacy work as rap idly as they do in this progressive country, the neg lect of depreciation and maintenance for a brief period leads to serious results. After some years of
lazy profit-taking the Western Union Telegraph Company was reduced to such a condition that the new management, which took charge in 1910, was obliged to cut $13,731,143 out of its surplus, to bring the accounts back to reality.
5. condition of incessant change in the field of industrial enterprise lays the emphasis not so much on property as upon manage ment. Mr. William L. Raymond has thus expressed the idea : The management of industrial concerns is a matter of far greater relative importance than the management of steam railroads or of public-service corporations—especially from the point of view of the safety of their securities. Where an entirely new business can be started without any great delay and where conditions of keen competition are likely to prevail, good or bad management is pretty nearly the whole story. Valuable and efficient plants, large work ing capital, control of patented articles or of some neces sary raw material, all are highly important and may be of great assistance in taking a corporation thru a time of difficulty ; but unless the plants are used wisely, economically and profitably by the management, they may have very little value for any other purpose and may be rendered almost useless by the competition of another concern that has as good or better plant facilities and more efficient management, and the most impressive assets as well as other advantages may be dissipated under poor management.
The point made here finds an illustration in the decline which is seen occasionally in the earning power of a plant absorbed into a consolidated corporation where owner management is supplanted by hired of ficer management. It is also to be seen from time to time in the wrecking of a business in the hands of a prodigal son.
The art of management has in recent years made rapid progress in the United States. The conditions of modern management are set forth in the Text on "Factory and Office Administration." The adoption of modern methods is not always a guarantee of divi dends to the investor, but it is important in the sense that it shows that those in charge of the enterprise are disposed to inquire into and utilize the most ef ficient methods of conducting it.