Preferred Plan

"The existence of a sound and adequate capital structure underlies and conditions a railroad's prosperity. To be sound, a financial structure must hold fixed charges to a figure which clearly should be earned in times of depression. To be adequate, it must afford means of securing new capital whenever needed, in whatever amounts required, on advantageous terms."

This nugget of railroad wisdom appeared last week in a letter to the contented stockholders of Chesapeake & Ohio Ry. For their approval President William Johnson Harahan submitted a plan to make C. & O.'s finances even sounder, more adequate, than they are now. The plan hinges on the creation of a new preferred stock which may be used 1) instead of bonds, to raise fresh capital and 2) instead of cash, to pay dividends on the common. The preferred as a whole would carry the right to elect one-fifth of the board of directors, and the first series to be issued would be entitled to a 4% non-cumulative dividend.

C. & 0. has no immediate intention of selling stock. But as a general financing medium for the future the new preferred would further the rich coal carrier's ambition to increase the proportion of stock to bonds in its capitalization. Present ratio is 44% stock, 56% bonds, which is conservative. So far this year C. & O. had refunded at lower interest rates $60,000,000 worth of long-term bonds, incorporating in the new issues sinking fund provisions which will retire the entire amount by maturity. A relatively novel idea in railroad finance, the sinking fund in the case of C. & 0. will be taken care of by the saving in interest charges resulting from the refinancing.

Today C. & O. is in magnificent physical condition and the most consistently profitable major road in the U. S. But a railroad is never finished because it always needs money for "additions and betterments." In the past C. & 0'. has financed its improvements largely from earnings. Under the last ten years of Van Sweringen management the road has added $240,000,000 to its investment accounts, yet increased its funded debt only $14,800,000, its stock only $88,000,000. The balance represents plowed-back profits.

With the new Federal tax on undistributed corporate earnings, plow-back financing may be very costly to stockholders. One loophole--for the corporation but not the stockholders--is to pay dividends in stock. That is the second use to which C. & O. will put its new preferred, a $2 extra in preferred stock being planned for this year. A $1 extra in cash is also planned but C. & O. will still retain enough of its 1936 earnings by the preferred plan to finance its ordinary improvements.

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