RAILWAY INVESTMENTS

FINANCE

AMID the depressing influences which have lowered security values in nearly every market, Railway stocks have made a gallant attempt to respond to the favourable developments affecting their own position. The attempt has not been entirely successful, for the railway stocks have not been immune entirely from the generally depressing influences, and railways have their own problems. But whereas it appeared until a few weeks ago as if there were no bright spots in the railway outlook, the situation has been com- pletely changed by the decision of the four trunk railway companies to increase their carriage charges for passengers and goods. Until this step was taken it seemed that railway finances, after deriving some benefit from the improvement in traffic and the reduction of the burden of local rates as a result of winning their case for modification of their assess- ments, were likely to deteriorate again through the pressure of rising costs for materials and labour. Although dependent upon the activity of trade for the volume of their business, railways cannot readily pass on an increase in costs, which normally accompanies an improvement in trade, and last year costs were rising rapidly owing to the sharp advance in prices of metals and promise to increase further owing to the demands of Labour for restoration of the remainder of the cut in wages made in 1931. Railway Ordinary stocks, therefore, were not by any means an attractive equity invest- ment to be bought with a view to maintaining the purchasing power of investment income by participation in rising trade activity. Indeed, it looked as if stockholders were likely to suffer a double depreciation of their income, first through a contraction of dividends, and, secondly, through a reduc- tion of purchasing power of such diminished income.

THE RAILWAY STOCKHOLDERS' " CHARTER."

At this juncture the railways decided to make use of their powers under the Railways Act of 1921. When that Act was passed it was hailed as the " Railway Stockholders' Charter," but its provisions, so far, have failed of their intention. The Act established so-called " standard revenues " for the four trunk railways, based upon net revenues of 1913, with allowances for subsequent capital expenditure. The Act was intended to ensure that any increase in railway net revenues should go mainly to assist trade in the form of lower charges, the railways retaining a portion of such improvement so that they had an incentive to improve their efficiency. Conversely, if railway net revenues fell and such fall was not due to inefficiency, the companies had power to raise their charges.

The arrangement turned out to be a mast short-sighted one ; it meant that when trade was active and flourishing, and in a position to afford to pay the existing transport charges, the railways would have to reduce them, and when trade was bad and needed every encouragement the railways could throttle it still further by advancing their charges. In prac- tice, the railways have not taken advantage of their powers in this direction ' • they have nursed trade to the best of their ability and at the expense of stockholders' dividends.

SUB-STANDARD REVENUES.

In 1932 the net revenues earned by the four main line companies were only a trifle more than one-half the standard revenues which they were entitled to earn. The Southern, with its large proportion of passenger revenue, was nearer to its standard than any of the others. Gradually the position has improved, thanks to the strenuous efforts in the direction of economy on the part of the railways and, in the last two years, to improvement in traffic owing to better trade, aided last year by the reduction of the burden of local rates. But it appeared very doubtful if railway net revenues could even remain level, despite the continuing improvement in trade and growth in gross revenues owing to the rapid rise in ex- penses. This rise was due, first, to the trade improvement itself, with its effect on the prices of primary commodities, secondly, to the coal marketing schemes which added some shillings per ton to fuel costs, and, thirdly, to the agitation by the Unions for the restoration of the wage cuts and of working conditions, even though net revenues were still below what they were when the railway Unions agreed to the cuts and to more onerous working conditions in the light of the necessities of the railway companies' finances.

TILE HIGHER CHARGES.

Although railway gross revenues have been improving very substantially during the current year, showing an increase of nearly 41 per cent. upon last year's figures, it appeared highly probable that the whole amount would ba., absorbed in the higher expenses. The decision of the railway companies to raise their charges, however, has changed the whole situation. An addition of 5 per cent. to charges, which is the figure for which the railways are asking, would represent nearly L9,000,003 between them, and even if it is not fully effective through concessions in various directions it should yield somewhere about L8,000,000, assuming that the volume of railway traffic does not contract. There is little reason for apprehension on this score, for the competitive powers of road transport have been much reduced. The rise in railway revenues promised by the improvement in trade and the addition to charges should give fresh hope to the Ordinary stockholders and holders of those Preference issues whose present dividend position is precarious.

IN TERMS OF DIVIDENDS.

On the basis of a full year's earnings at the higher level of charges, the Great Western Railway, for instance, should gain about £I,000poo in net revenue, equivalent to about 21 per cent. on the stock. As the company earned and paid 3 per cent. last year, such a dividend would put the stock approximately upon a 9 per cent. yield basis at its present price. The London Midland and Scottish has the prospect of earnings of about 4 per cent. on the stock, which would make the yield basis ever in per cent. North Eastern Railway Second Preference stock would be earning 31 p.n. cent , making the yield nearly 14 per cent., and Southern Deferred should be able to earn 2i per cent, making the yield over to per cent. These. estimates allow for an increase in working expenses of the same amount as the

(Continued on Page 1074-) FINANCE

(Continued from page 1o72) - gain in gross receipts ; that is to say, they take account only of the prospective addition to net revenue through the increase in charges, which increase, of course, involves in itself no additional expense as it is a gain of revenue due to carrying more traffic.

HIGHER EXPENSES IN PROSPECT.

The rejection last week by the Railway Companies of the Union's application for the restoration of the remainder of the cut in wages did not imply a refusal out of hand to consider the question in any circumstances, and a consequent precipitation of a strained position between the railways and their employees. The claim for the wage restoration was coupled with others involving a reduction of working hours to 36 per week and the adjustment of working conditions in various respects. The rejection of the claim simply means that it will be referred to the National Tribunal, set up for the purpose of adjusting such questions, who will examine each item of the claim and adjudicate upon its merits. Even if a substantial part of the claim is admitted to be justified, however, a substantial margin will still remain for a restoration of dividend rates.

The Railway Companies' request for power to raise their charges will have to be examined by the Railway Rates Tribunal, whose approval is necessary, but in the cir- cumstances, with the railway revenues so far below their standards, the sanction of the Commission will not be withheld. With this improved prospect before the Ordinary stocks, the position of the Debenture and Preference issues is also brighter, for instead of a prospective contraction in their margin of? security, there is every possibility of a sub- stantial addition to that margin, and many of them are standing at prices at which they are attractive as compared with most other fixed-interest securities. A. W. W.

(Financial Notes on page 1075)