Now when you are asked to lend money on a house or landed property, you inquire in the first place what its rental is, and how much of that rental remains after paying the necessary outlay for taxes, repairs, etc. You do not lend unless the net rental, after deducting these outlays, is sufficient not only to pay interest on the loan, but also to provide a substantial margin for contingencies. You also procure a valuation of the property, and as a rule limit your loan to two-thirds of the value. In the case of railway securities you have to be satisfied with the rental, as it is not possible to get a proper valuation. You can ascertain what it has cost in the past; but it is impossible to tell whether or not it is worth as much to-day. Mr Keir Hardie has views on the subject which, however, one would hope are not likely to be realised. He thinks that when his party comes into power the railways of this country will be taken over by the State at the price of scrap iron; and if he is right in his forecast I fear even railway debenture-holders will fare badly, while the preference and ordinary shareholders will get nothing. I think, however, that theory may be ignored! Failing, then, the possibility of getting a valuation, we have to base our criterion of the value of the security on the income, and this income is represented by the net profits of the railway. The table shows the net profits of the twelve railways for the year 1902 (which I have taken as being the most recent full year available at the present time), and a fair idea of the relative security for the last preferences of the various lines can be obtained from the column showing the proportion which the amount paid in ordinary dividend bears to the net profit. It represents the margin which would have to be swept away before they could suffer. For example, the London and North-Western, after paying the dividends on debenture and preference stocks, had still 40 per cent of its profits available for dividends on the ordinary stock. It had, therefore, a margin of at least 40 per cent as security for the preference stocks. On the other hand, the North British Railway had only 20 per cent available for dividends. If the net profits of both the London and North - Western and the North British Railway were reduced by 40 per cent, the London and North-Western would still have been able to pay interest on its preferences, while the North British would have had to pass the dividend on preferences to the amount of about £10,000,000.

I do not say that a standard of this kind should be adopted without further inquiry into the general conditions of each railway, for there may be special circumstances which render the continuance of the net revenue more probable in one case than in another. You may also think that such an inquiry is needless and there is not much probability of a serious drop in the net earnings of a railway. As such an event has happened, it is well to keep the principle in view, that the narrower the margin after payment of the debenture and preference charges, the less valuable are the later preferences of a railway. The railway which has been the unfortunate exception to the rule is the Great Central. It was originally known as the Manchester, Sheffield, and Lincolnshire Railway, and except in the year of the coal strike it had paid its preference dividends in full. Ten years ago, however, it obtained power to extend its system to London, and the cost of the London extension so crippled its finances that in 1900 it ceased to pay dividends on its preferences from those of 1874 onwards. The pinch would have been felt even sooner than 1900 had it not been that (in terms of the Extension Act of 1893) the interest on the amount expended was authorised to be paid out of capital during the construction of the extension. Since 1900 it has been gradually reducing the number of preferences on which no dividend is payable until now (11th January 1904) the 1879 preference dividend is payable in full, and the 1881 preference receives a payment to account. The 1889, 1891, and 1894 preferences are still without dividends.

Notwithstanding this episode, I do not think we need depart from the view that the preferences of the other eleven railways in the list are fairly well secured. If the Great Central had been satisfied with its original size it would not have been in the unfortunate position it is to-day.

As to the smaller railways there is much greater diversity, and it cannot be said that in all cases the stocks constitute good securities. It is probable that investments in these smaller lines may be brought under your notice. In that case I would recommend you to apply the method I have already indicated for comparing their security with that of others of undoubted strength. At the same time it should be kept in view that, other things being equal, a large railway is more likely than a small one to be well managed and to continue its dividends; and that the stocks of small railways are less marketable.

When we come to consider the relative security of the preferred ordinary stocks the same tests of margin should be applied, and on that account the fixed rate of interest allotted to them has an important bearing on their value as investments. The smaller the rate of interest that has to be met out of the ordinary dividend fund the better the security. For instance, the Midland and the Glasgow and South-Western preferred ordinary stocks, which bear only 2 1/2 per cent, are naturally - other things being equal - better securities than the Great Northern preferred ordinary stock, which nominally is entitled to interest at the rate of 4 per cent before the deferred ordinary stocks receive a dividend.