Public Utility Bonds

Another large and rapidly growing class of bonds is composed of the issues of corporations operating public utilities, such as street railways, telephones, gas and electric-light plants, etc. Those offered in the market, however, are frequently new and based on properties in course of construction. They are disposed of on "estimated" earnings and well-written prospectuses. In such cases investors should never forget that, as a rule, all the risk of the enterprise is put upon the bond buyers. If it turns out a success, their investment will be good and they will get their 5 per cent. per annum. All the rest of the "estimated" profits that illumine the pages of the prospectus - be they ever so large - will go to the promoters of the scheme, who, as a rule, have put in no money of their own.

If it turns out a failure, the bondholders will be the only losers. This division of profit and risk does not seem quite equitable, but it is astonishing how ready many people are to accept it. The moral is plain: Never invest your money in the bonds of any such enterprise until it is completed and can show actual net earnings of not less than twice the amount required to pay the interest on its bonds.

Many of these enterprises are legitimate and profitable, and offer good security for their bonds. But it is time enough to buy the securities after their safety has been demonstrated by actual experience. This is a good rule, indeed, in regard to any investment.

Waterworks Bonds

There is another class of bonds somewhat similar to those last mentioned - waterworks bonds. The provision of law, before alluded to, limiting the borrowing power of municipalities to 5 per cent. of their assessed property value, prevents many towns from owning their own waterworks. The plan usually adopted is to form a corporation to which an exclusive franchise is granted to build waterworks. A contract is then entered into between the municipality and the water company, by which the latter undertakes to supply the former with a certain number of hydrants for fire protection, etc., for a certain sum per annum. This annual payment is then used to form a sinking fund for the retirement of the bonds issued to cover the cost of the waterworks. The company has also the right to sell water to the inhabitants, and the enterprise is frequently a profitable one, forming a safe basis for the issue of bonds. As usual, however, there are numerous dangers to be avoided, and possible losses to be feared.

One of these is that the water supply may not prove sufficient. Another is that the construction of the works may be cheap and not last as long as the life of the bonds. Still another danger is that the municipality cannot be bound by its contract longer than the fife of the council which made it. A succeeding council may reduce the price paid for the hydrants. The greatest danger of all is that the company may get into a fight with the city; that the citizens may claim that the water is impure, and that as a result the waterworks may be abandoned and another water supply adopted. When I lived in Du-luth, I witnessed such a fight brought about by an epidemic of typhoid fever. When the fight began, the water company's bonds were considered a first-class investment, and its stock was very valuable. When it ended, the bondholders got seventy cents on the dollar and the stockholders nothing.

I might go on discussing miscellaneous bonds, but it is not necessary. Enough has been said to indicate the dangers to be guarded against, and to show that careful investigation before buying is a necessity; for while there are good, safe investments offered in all classes of bonds, it is easy to lose money.