The following are figures similar to those in the previous table, showing - (1) The net revenue of five of the great railways which have subdivided their ordinary stocks; (2) the amount required to pay the deferred dividend for 1902; and (3) the ratio which the deferred dividend bears to the net revenue. Other two of the twelve railways have divided their ordinary stocks - namely, the Great Northern and the Great Central; but these have been excluded from the table because no dividend was paid for 1902 on their deferred ordinary stocks, and the margin over preferred ordinary dividend had disappeared for that year.

Margin Of Dividends For Deferred Ordinary Stock

It will be seen that the Midland had a margin of 23 per cent after paying the preferred ordinary dividend, while the corresponding rate for the North British and the Caledonian was 9 per cent only. One can understand, therefore, the reason why the Caledonian preferred ordinary should sell at a price to yield £4, 2s. 3d. per cent on 29th December last, while the Midland preferred ordinary should sell at a price to yield £3, 15s. 9d. per cent. The return on North British preferred ordinary was £3, 19s. per cent. (I have in this case compared the return on the different stocks at the market price, as the market price itself cannot be compared in consequence of the difference in the rate of interest.) As a matter of fact, if we look at the figures in the two tables it will be seen that the Midland preferred ordinary stock appears to be a better security than the preference stocks of several of the other great railways.

It should be mentioned that the preferred ordinary stock of the Caledonian and North British are at a disadvantage as compared with the preferred ordinary stock of the English lines. The dividend on these depends on the profits of each full year. In the Scotch lines the dividend is paid out of the profits of each half-year. This is a very important distinction. You are aware the railways in this country have much larger profits in the second half-year. In England any deficiency in the lean half-year may be made up out of the fat half-year; but in Scotland, if the dividend fall off in the first half-year there is no claim for the deficiency out of the profits of the second.

The comparative tables I have shown you must be taken with the caution that they are based on the returns for one particular year, which may or may not be representative of the normal state of matters. It is not always safe to act on the results of one year. A particular railway may have been exceptionally prosperous in the year that has been chosen, or the reverse; and the figures would not show its true condition. In making your comparison, therefore, it is advisable to average the figures for several years. As far as I am aware, however, there were no special circumstances in 1902 to render the comparison an unreliable one. It is so far suitable for the purpose of judging as to the security, in respect that any estimate based upon it is likely to be a fairly safe one, since the dividends during that year were almost at the lowest point experienced in the last ten years. The railways of this country have lately been passing through a period of depression. The average dividend on the ordinary stock in 1893 was 3 1/2 per cent. It gradually increased till it reached 4 1/4 per cent in 1896, but since then it has fallen gradually till in 1901 the bottom was touched at the average rate of £3, Is. per cent.

It is impossible to foretell the future of British railway finance. The depression to which I have alluded has not been caused by bad trade or by any decrease in the earnings of the railways, which, as a matter of fact, have grown with the wealth and prosperity of the country. In thirty years the gross railway earnings have more than doubled, - from £53,000,000 in 1872 to £109,000,000 in 1902, - and during that period, with the exception of the years 1879, 1885, and 1893, there has been a steady increase. The growth of the number of passengers is still more striking. In 1850 the passengers carried numbered 73 millions, in 1880 604 millions, and in 1902 nearly 1200 millions, so that the number now is seventeen times as great as it was fifty-two years ago, and twice as great as it was twenty-two years ago. The unfavourable fluctuations in profit, therefore, have not been caused by any falling off in the business done by the railways, but are due partly to the larger amount of capital spent on their property and partly to additional cost of working. In the last ten years £200,000,000 of additional railway capital was raised in the United Kingdom, without taking nominal additions into account; in other words, about one-fourth has been added to the capital, and consequently one-fourth more profit is now required to pay the same dividend. The increased cost of working has arisen from many different causes, the principal being the rise in the rate of wages of the railway employees, and the increase in the price of coals and of materials generally. The price of coal is a very important factor. It was at a low point in 1896, and dividends then reached their maximum. The price rose for several years and the dividends decreased. The price again began to fall, and in 1902 the railways were able to pay larger dividends.

The enhanced cost may be best shown by the ratio it bears to the gross earnings of the railways. In 1896 the aggregate working expenses of the railways of the United Kingdom exhausted 56 per cent of the gross receipts, while in 1902 the ratio was 62 per cent, the increase in six years being 6 per cent. Now if this 6 per cent had been saved - if the railways in 1902 had been able to work at the same rate of expense as in 1896 - the shareholders would have received 1 1/2 per cent additional dividend. It would therefore seem that the main source to which the railways should look for greater profit is to be found in reduction of expenditure. The prosperity of the country may help them, and bad trade may affect them prejudicially, but there is no doubt that judicious economy and adoption of the best means of handling the traffic are wanted in order to effect any real improvement in their position. Railway management in the past has been run too much on conservative lines, but there are signs at present of a growing tendency to take up new methods which make for economy. I shall only refer to one of these - namely, the haulage of mineral traffic. We employ small waggons in this country, while those used by the American railways are much larger, and they are enabled to carry their mineral traffic at less expense than we do. Some of the English railways are now purchasing larger waggons, and if the railway management is able to secure the co-operation of traders and mine-owners a considerable saving is likely to be effected. This, however, is only one change out of many to which railway reformers point as being required in the management of our railways. A general lack of enterprise and a conservative preference for old methods have stood in the way of railway development in the United Kingdom as compared with the United States. To a certain extent our backwardness is probably due to the difference in the systems of the two countries. In America the railroads are managed by a President (or possibly by a clique, of which the railroad president is the head) possessing arbitrary power. He is thoroughly acquainted with all the details of the vast business; his hands are not tied by having to refer his actions to a large board of directors, as in this country; he is able, since he does not require to consult colleagues who might be indifferent or reactionary, to take advantage at once of new inventions and new methods, and to strike out in new directions. In this way the American railways have made far greater progress than those in this country. The method at the same time has its disadvantages. The English system of management by boards of directors, who are subject to be called to account by the shareholders at every turn, is naturally slower and less productive of profit to the railways; but it tends to purity of administration, and gives less opening for the abuses which are sometimes found in American railway finance. It is difficult to say which has the balance of advantage from a monetary point of view. The profits of some of the American railways exceed any of ours; but, on the other hand, a much larger proportion of the capital has been lost. We may, however, flatter ourselves that while the American system gives higher dividends, ours on the whole gives a greater feeling of security in railway investments generally. We must not, however, flatter ourselves too much; and it would be wise to extract what is good from the methods in America and leave aside what is bad. I therefore mention another point where we are at a disadvantage - another striking weakness in British railway finance. Our railway companies live practically from hand to mouth, and lay nothing aside for a rainy day. There are great possibilities in railway book-keeping, and although some may make a point of renewing their line and rolling stock out of revenue to as large an extent as they are entitled and ought to do, yet the general impression is that in order to provide dividends most lines take too much of the cost of keeping the line in order out of capital and charge far too little to revenue, while the amount carried forward is reduced to a minimum. The result has been that a good many of the lines have been starved, whereas if smaller dividends had been given to the shareholders, and the revenue applied to keep the lines in thorough working order, there would not have been the same necessity for the yearly additions to capital account which we see growing year by year. Railway reformers urge that the capital account of our railways should now be closed except for the construction of new lines. If this were done, the shareholders would at first have to suffer a diminution in dividend, but they would probably be amply repaid in the future. It would be well if they kept in view the example of the American railways, some of which reserve from one-third to one-half of the profits available for dividend. I can quite understand that if such a course were recommended by the directors of a railway in this country there would be a chorus of disapproval from the shareholders; but it is the adoption of such a course that has enabled these American railways to continue dividends in years of depression, and has mainly caused the prosperity which they are enjoying at the present time.