There are, however, in some cases influences which counteract the effect of priority. For instance, the Caledonian Railway 1884 Preference is at present quoted at a lower price than the 1887 Preference, although the former ranks for dividend before the latter, the reason of the anomaly being that the 1887 Preference may at any time be converted by the holder into ordinary stock. At the present time the option cannot be turned to practical advantage, for the ordinary stock is quoted on the day I write at 103, while the 1884 and the 1887 Preferences are quoted at 114 and 115 respectively, and there would be no advantage in converting a stock the value of which is 115 into one the value of which is 103. But we must remember that an ordinary stock has the prospect at some future time of receiving dividends exceeding 4 per cent, while a 4 per cent preference stock can never get a larger return. The Caledonian ordinary dividend has during the last nine years been less than 4 per cent in only one year. It has been as high as 5 1/8 per cent, and the price of the stock has been as high as 166. It is impossible to say if it will ever reach that figure again, but there is naturally a greater possibility of substantial improvement in the price of the ordinary stock of a well-conducted railway than in the price of its preferences; hence the option to convert a stock bearing a fixed dividend into one depending on the success of the railway seems worth more than is' represented by the small difference in price to which I have referred. Another example may be found in the North British Railway. The first in order of its preferences, contingent on the profits of each half-year, is its Consolidated Preference No. 2, which is selling at 116 1/2. It has behind this eight classes of convertible preferences (that is, preference stocks convertible into ordinary stock at the option of the holder) - and these all stand at the same price as the ordinary stock (118), which is 1 1/2 per cent higher than the better secured preference.

Ordinary Shares And Stocks

The ordinary shares and stocks represent what may be called the speculative portion of the railway capital. All the obligations of the railway, including interest on the debenture stock and dividends on the preference stock, must be paid before the ordinary shareholders can receive a dividend. In recent years arrangements have been made for still farther dividing the speculative from the investment element by converting the ordinary stock into two classes called respectively "Preferred Ordinary" and "Deferred Ordinary" stock. Preferred and deferred ordinary stock can only be issued in exchange for equal amounts of paid-up ordinary stock. The preferred ordinary bears a maximum non-cumulative dividend; while the deferred ordinary receives the balance of dividend payable on the ordinary stock above the rate payable to the preferred ordinary. In some railways the shareholders have the option of either holding their stock undivided or of dividing it. In others the conversion into two classes is compulsory and the old stock is cancelled. You will understand the system from a statement of two actual examples. The Midland Railway Company in October 1897 issued, in substitution for each £100 of its then existing Consolidated Ordinary Stock, £100 of Preferred Converted Ordinary Stock entitled to a uniform dividend of 2 1/2 per cent per annum payable out of the profits of each half-year, but cumulative as far as the next succeeding half-year is concerned; and in addition £100 Deferred Converted Ordinary Stock entitled to such half-yearly dividend as may from time to time be declared thereon after providing for the dividend on the Preferred Converted Ordinary Stock. Two and a half per cent was paid during 1902 on the Preferred Converted Ordinary Stock; while on the Deferred Converted Ordinary Stock the dividend for the first half-year was 2 per cent, and for the second half 3 1/2 per cent, or 2 3/4 per cent for the year. The dividend, therefore, for that year was equivalent to 5 1/4 per cent on the stock if it had not been divided. In this case the whole stock was divided, and no option was given to the shareholders to retain the old ordinary stock.

The next example is that of the Caledonian Railway Company, which in 1890, in terms of the company's "Conversion of Stock Act, 1890," allows any holder of the ordinary stock at any time, by application in writing, to require the company to convert his stock into Preferred Converted Ordinary Stock and Deferred Converted Ordinary Stock, each equal to the amount of ordinary stock so converted. Any dividend declared in each half-year on the undivided ordinary stock is apportioned - first, in payment of a dividend at the rate of 3 per cent per annum on the Preferred Converted Ordinary Stock; and, secondly, in payment of any balance to the holders of Deferred Converted Ordinary Stock. The undivided ordinary stock amounts at the present time to £5,994,000; and stock has been divided to the amount £12,465,000 - that is, the company has issued £12,465,000 preferred ordinary and £12,465,000 deferred ordinary stock; so that more than two-thirds of the holders have taken advantage of the option.

The general power for splitting up stock in the manner indicated is prescribed in the "Regulation of Railways Act, 1868," and is limited to railways which in the year preceding have paid a dividend on their ordinary stock of not less than 3 per cent; and the maximum non-cumulative dividend which the Act allows on the preferred ordinary stock is 6 per cent per annum. The principal railways which have taken advantage of this power are the Caledonian; Glasgow and South-Western; Great Central; Great Northern; London, Brighton, and South Coast; London and South-Western; Midland; North British; and South-Eastern: while the Great Eastern; Great Western; Lancashire and Yorkshire; London, Chatham, and Dover; London and North-Western; and North-Eastern have not adopted the principle. It will be seen that the majority of the important lines have divided their stock; but their original ordinary share capital is considerably less than that of the six important lines which have not done so.