Railroad Bonds

Under this head come, first, railroad bonds, which have absorbed more capital than any other investment in this country. In the year 1899, there were 187,781 miles of railroad in operation, the bonds on which amounted to $5,699,858,000, or $30,000 per mile. The interest paid on the bonds was $245,250,000 or 4.12 per cent. This great class of investment securities is composed of various kinds. We have not only first, second, and third mortgage bonds, but consolidated mortgage bonds, income bonds, convertible bonds, terminal bonds, collateral trust bonds, equipment bonds, etc.

Among such a mass and variety as I have mentioned there are many of inferior quality, and some of even worthless character. The chief guide for the investor is in the earning capacity of the road, and reliable information on that point is easy to obtain. If the road's net earnings are at least twice its bonded debt charges, and if the road is well kept up so that such earnings are likely to continue, the bond may be considered satisfactory in that respect.

There is no difficulty in procuring good railroad bonds as an investment, if the investor confines himself to the issues of well-established roads, and is content with a return of 4 per cent. or a little less. It is when the bonds of new railway projects are offered that caution is necessary.

It is a well-recognized principle in railroad building that the road should be made not only to pay for its cost, but to yield a profit to the projectors besides. In other words, there is usually some "water" in the first issue of bonds - to say nothing of the stock. The squeezing out of the water in times past has frequently been an expensive operation for the bond holders. The appointment of a receiver, the discrediting of the securities, the purchase of them by "insiders" at a heavy discount, the "reorganization" of the road, or the sale of it to a large system, and the final happy outcome for said "insiders," is a process with which the student of railroad history is familiar.

Nor have cases of actual fraud in this line of operation been wanting. Sometimes they break ground for a railroad with great ceremony. Then they proceed to break the shareholders without any ceremony.

The Arkansas Central Railway Co. built only forty-eight miles of its projected road, but its promoters succeeded in floating $5,000,000 in bonds of one kind or another on it. The road was so poorly built (what there was of it) that it was almost worthless. When it was sold by the receiver at public auction, it brought the sum of $40,000, and even that was paid to the receiver in his own receiver's certificates, which had been bought at a discount. Such cases sufficiently illustrate the kind of dangers to be avoided in this class of securities. Our railroads at present, however, are in better condition than ever before. As a rule, they are properties of enormous value and productive power, and no better securities, as a whole, can be had than properly selected railroad bonds.