Shares issued by one corporation for the payment of the principal, or dividends on, one or more other corporations have legally assumed responsibility. Stocks may be guaranteed as to dividends only, or as to both principal and dividends. Such stocks are a very favourite form of investment, especially guaranteed railway company shares. A great many of the large railway systems comprise smaller properties which have been leased for a term of years, sometimes the length of such lease, for all practical purposes, being in perpetuity, the smaller property being leased to the parent company in consideration of a fixed rental, from which sum are distributed dividends to the shareholders. In the case of a leased line to any one of the large, prosperous railway properties of the country, there can be little question as to the safety of the investment. In the case of a guaranteed stock the main points necessary to consider are the ability to pay on the part of the lessor company and the value of such leased line to that company. Of course, it is well to ascertain the validity of the contract between the two companies, but under the present ability of expert lawyers to raise legal quibbles over fine points, there seems little reason to suppose that any rich and powerful railway company could not find a means to invalidate any lease which it thought profitable to get rid of, and, therefore, the safety of guaranteed stocks, like many other investments, among other things, depends upon the probable intention on the part of the guarantor to fulfil the obligation. This latter point, however, need not always be given very serious consideration, because, as stated above, stocks bearing the guaranty of our well-established railway properties, as a class, certainly present a minimum of risk to the investor, and it is not well to doubt the intention to pay on the part of the present and future managers of such corporations.
Many of our guaranteed stocks may legally be purchased by savings banks of our Eastern States, and, consequently, command prices which reduce the interest return to within the neighbourhood of 4%. A great many of them are non-taxable when held by citizens of the State in which the roads are located, and, withal, there are so many good features, about guaranteed railway stocks that they must be considered as one of our most conservative forms of investment. There are numerous stocks of this class in which the guaranty expires in a comparatively few years. The price at which such stocks sell should be based upon their being worth not over $100 a share at the time of the expiration of the lease or guaranty. In other words, they should be figured for their interest return as a bond which has a fixed date of maturity, unless there is every reason to suppose that, at the expiration of the lease, it will be renewed upon as favourable terms as at present existing. There are some guaranteed railroad shares which now pay dividends at the rate of 6% or over per annum, the leases of which expire at no distant date, and of which, owing to the ability of the lessor company to be in position to dictate terms, it is fair to assume that no renewal will be made which will warrant better than 4% dividends in the future.
There are some large railway corporations which are burdened with the leases of a great many smaller companies, which latter do not return sufficient earnings to warrant the payment of the rental. It is probable that a great many such leases would not be made to-day on the same terms as originally. In some instances they resulted from insiders buying up stocks of small independent companies, selling at low figures, and, after obtaining the control, leasing them to connecting railway lines for a term of years at a high rental. This kind of financing proved very profitable from the increase brought about in the market price of the shares.
The moral side of such an action we will not discuss, but it all has a bearing upon the renewal of such leases after they expire.
"Guaranteed stocks," other than railway issues, must depend for their safety entirely upon the value of the guarantee and the necessity of the guaranteed company to the parent company.