u_

High Yield and Safe Investments

Opportunities Created by Unfounded Prejudices-Instances
of Six Per Cent, Safety, and a Probable Ten Point
Profit—- List of Bonds, Preferred Stocks, and
Common Stocks
By BENJAMIN GRAHAM

ITH the bond market moving too is just as possible as 4% and safety
fast to be photographed—to say only it requires greater care and dis
nothing of being analyzed—in— crimination in selecting the investment.
vestment suggestions are out of The fact is that whereas ordinarily a
date almost before the ink is dry. In the high yield is due to uncertain security,
very course of writing this article, it has in many particular instances the reason
been necessary to change the viewpoint may have no connection with the intrinsic
in order to conform to the rapid advance merits of the issue. It is here that the
in bond quotations; and whereas a week careful investor will find his opportunity
or two ago the term “High Yield" would and the signs whereby these bargains
have denoted at least a 6y2% or 7% re— may be recognized are twofold:
turn, we must now regard anything A. Securities safe but unseasoned.
above a 6% income basis as belonging B. Securities safe but affected by in
to the high yield category. vestor’s prejudice, never or no longer
This is an excellent opportunity to at justified.
tack that ancient and deep rooted mis Some Cheap 6% Bonds
conception-namely that a high yield An excellent example of a high grade

LIST I—ATTRACTIVE BONDS YIELDING 6% OR BETTER

Due Price Nov. 12 Yield
Armour Co. conv. 6s . . . . . . . . . . . . . . . . . . . .. . . . . 1924 991/2 6.10%
Bethlehem Steel Purchase Money 551.. . . . . . . . 1936 84 6.52%
Braden Copper collat. 6s . . . . . . . . . . . . . . . .. . . . . 1931 95 6.55%
Chile Copper conv. 6s . . . . . . . . . . . . . . . . . . . . . . . . 1932 89 7.35%
Granby Copper conv. 6s . . . . . . . . . . 1928 100 6.00%
Missouri Pacific consol. 5s . . . . . . . . . . . . . . . . . . . . 1923 94 6.60%
N. Y. Air Brake 1st 65 . . . . . . . . . . . . . . . . . . . . . . . . 1928 99 6.15%
St. Louis, Iron Mt. & So. ref. 45 . . . . . . . . .. . . . . 1929 82 6.29%
Texas Co. deb. 6s . . . . . . . . . . . . . _ . . . . . . . . .. . . . . 1931 100 6.00%
Virginia-Carolina Chemical conv. 6s . . . . 1924 100 6.00%
Wilson Co. 1st 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1941 98 6.14%

must necessarily signify greater risk than bond selling on a high income basis be
a low yield. As applied to the general cause of lack of seasoning is found in
run of securities, this rule is obviously the Wilson & Co. 1st 65 due 1941, which
true enough—one hundred bonds picked at this writing can be bought below par.
at random from the 4%% class will The stable character of this company's
eventually be found to include a smaller business—meat packing—and its splen
percentage of defaults than the same did earnings record in recent years,
number of 6% issues. But with indi should place its first mortgage bonds in
vidual securities the case may be very the class of high grade investments.
different; and there have been and still In the same category may be placed
are innumerable examples of high yield Chile Copper convertible 65 due 1932,
obligations which are really better pro which having been brought out at the
tected than many others selling on a worst possible time speedily sustained a
lower basis. “Six Percent and Safety” severe decline in market value, from
(184)
F
which they have only recently been re
covering.

important
The present earnings of the

to recognize that, first,

bonds of good copper companies have in

variably been exchanged for stock-and
HIGH YIELD INVESTMENTS

mine cover interest charges with a wide

margin to spare; and any possible reduc
tion in the profit per pound during the
next few years is certain to be more than
compensated for by the increased output
which peace will make possible. It is
Chile
Copper is an enormous property with the
strongest bankers and the best engineer
ing talent behind it; second, there are
3,800,000 shares of stock with a market
value of about $90,000,000 standing be
tween these bonds and trouble. The his
tory of mining shows that the convertible

there is'little doubt but that the holders

LIST II—STANDARD INDUSTRIAL PREFERRED

Am. Agric. Chemical . . . . . . . . . . . . . . . . . . ..

Am. Car & Foundry
Am. Smelting & Refining . . . . . . . . . . . . . . ..
Central Leather
B. F. Goodrich . . . . . . . . . . . . . . . . . . . . . . . . ..
International Harvester
continued the entire financial resources
of the country would stand solidly be
hind the Allies.

than four billions.

Rate
6%
7%
7%
7%
7%
7%
Price Nov.
96%
111
110
108
104
110
“7 hat else could these
facts mean but that every French and
English loan placed in this market was
absolutely safe—because

12
either the war
would be over when they matured, in
which case they would easily be taken
care of; or else the United States itself
would assume the burden, as part of its
financial aid to the Allies. It might have
been observed that our advances
France and England were running at the
rate of six billions a year, while their
net imports from this country were less
to

Evidently our loans

to the Allies were covering not only their
purchases in this market, but their ma
turing obligations as well.

STOCKS

Yield
6.09%
6.30%
6.36%
6.48%
6.73%
6.36%
Price to
Yield 6%
100
116%
116%
116/4
116%
116%
185

S. S. Kresge . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7% 105 6.85% 116%

National Lead . . . . . . . . . . 7% 105 6.85% 116%
U. S. Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7% 1121/2 6.22% 116%

of Chile Copper 6s will some day find it In the long months when the United
to their advantage to exercise their con Kingdom 5%5 ranged below 90 and the
version privilege. French Municipals sold in the “early
The list of bonds which have been eighties," the writer presented these ar
depressed marketwise by unjustified pre guments to investors time and time
judice is a very long one. Contrary to again. Did they dispute his reasoning?
general opinion, prices do not always No. But how many took advantage of
anticipate changed conditions, nor even this extraordinary opportunity? Very,
immediately reflect them. The Law of very few. Most of them "did not like
Inertia holds in finance as everywhere foreign bonds”—which meant that the
else, and broad intervals often elapse be handful of level headed investors who
fore investors accommodate their judg were superior to prejudice were enabled
ment to the new order of things. One to make a veritable killing.
or two examples from the past may win One other example, which has a bear
_
better attention for our comment on the mg on the recommendations to be made.
present situation. At the end of 1915, when railroad issues
were quoted on a 4%% basis, Railway
The Lesson of Allied Bonds
Steel Springs, Inter-Ocean Plant, 55 could
When the United States entered the be bought at 92. The company was then
war in April, 1917, two things must have in excellent financial condition; its earn
been apparent to every thinking man. ings had reached record proportions; and
First the war was bound to be won in there were two stock issues junior to the
the end. Secondly, as long as the war bonds to guarantee them against harm.
 186 THE MAGAZINE OF WALL STREET
But no bond house would have dared
recommend them to an investor seeking
conservative investments. The customer,
finding this issue on the list, would have
snified, “I ask them for high grade bonds
and they try to palm off this low priced
industrial. Fine people to trust my money
to!” Whereupon he would have jour
neyed to another house and selected a
list of railroad bonds beginning with
Atchison general 45 at 94, and perhaps
including some Saint Paul refunding 5s
at 107 to bring up the yield.
The wisdom of this typical investor is
shown by the sequel. In September last
when railroad bond prices were at their
lowest ebb, and the St. Paul 5s were
selling at 77—a decline of nearly thirty
points—the Railway Steel Springs Co. re
the equity of this issue measured by as
sets and earnings is so enormous that even
a total collapse of the oil industry could
scarcely destroy its value.
A very similar case is supplied by the
New York Air Brake 65 also selling
around par. The old-line investor thinks
of the company as a mushroom war
proposition, and views its bonds with
cold suspicion. Yet this issue is so small
Air Brake’s net current assets are so
large, and even its pre-war earnings so
greatly in excess of interest require
ments, that the safety of its first mort
gage bonds is now independent of any
fluctuation in the company’s earning
power.
Granby 6s
Again there are the Granby Copper

LIST III-SOUND INDUSTRIAL PREFERRED STOCKS YIELDING 7% OR

MORE
Price to
Rate Price Nov. 12 Yield Yield 6%
Am. Locomotive 7% 100 7.00% 116%
Bethlehem Steel 8% 104 7.69% 133%
General Motors 6% 855/, 7.01% 100
Republic Iron & Steel . . . . . . . . . . . . . .. . . .. 7% 100 7.00% 1163/
Pierce Arrow 8% 103 7.76% 133 4
Tobacco Products 7% 100 7.00% 11W
Virginia-Carolina Chemical . . . . . . . . . . . . . . 8% 111 7.20% 133 4
Willys-Overland 7% 86 8.13% 116%

deemed its remaining mortgage bonds at
105, thirteen points above the price at
which they couldn't be sold because their
yield was too high!
Perhaps this veracious tale may be
found~ to have a valuable moral for pres
ent day conditions. Here are Texas Com
pany debenture 6s selling at par and
yielding a full point more than U. S.
Steel sinking fund 5s. Mr. Average In
vestor remarks “I don't want an oil com
pany bond,” and picks out one of the old
favorites (which sell five points too high
just because they are old favorites). But
the level headed buyer investigates the
issue. He finds that these debentures
are the company’s only bond-—a small
issue with a large sinking fund just be
ginning to operate—that the company
has poured tens of millions into its prop
erty out of its extraordinary earnings
and continual stock issues, without in
creasing ils funded debt; and that finally
convertible 65, also due in 1928, and sell
ing around par. Many investors would
not consider them because they don't like
a mining company bond; others recall
Granby’s checkered career many years
ago and raise their hands in protest at
the suggestion. But there is an issue of
only $2,500,000; which is being retired
at the rate of over $500,000 per year,
which comes ahead of $15,000,000 stock
valued at over $12,(X)0,000; and the in
terest on which should be earned ten
times on 14%c copper. Since the sink
ing fund must retire the entire issue be
fore maturity, the owner is certain to get
110 for his bonds—the maximum price~
if he holds on to them long enough. In
other words, here is a combination of
safety, six percent and ten points profit.
Very similar is the status of Armour
and Co. 6% notes, due serially to 1924.
and convertible at any time into
7% pre
ferred stock at par. Some investors are
K
HIGH YIELD INVESTMENTS 187

frightened by the possibility of Govern— Preferred Stock:

ment control of the packing industry. Industrial preferred stocks are more
For the same reason it was so hard to attractive now than at any time in their
dispose of the Am. Tel. & Tel. convert history. The status of most companies
ible 65 at 94 (now 104)—the most attrac has improved so radically in recent
tive offering of the year. years, that the dividends on their senior
The public could not be made to see shares should henceforth be assured.
that in both cases the disadvantage of Moreover, since the average yield of pre
Government control would fall entirely ferred stocks is still well above the pre
on the large stock issues, while the ad war figure, the gradual return of interest
vantage of guaranteed earnings would rates to pre-war levels should effect a
directly benefit the bondholders. substantial advance in the price of these
With practically a half billion of 8% issues.
stock in back of them, what had the A. Our selection of preferred shares has
T. & T. bondowners to fear for their in been arranged in two groups. The first
terest? And with a hundred millions of includes the standard seasoned issues,
Armour stock outstanding, the holders which in the old days were wont to sell
of the new notes have a comfortable around 6% basis, and which now yield
buffer between them and confiscation. between 6.30% and 6.75%. These are

%_E_
LIST IV-COMMON STOCKS WHICH ARE CONSERVATIVE INVESTMENTS
Dividend Rate Price Nov. 12 Yield
Am. Telephone Telegraph . ..
&

. . . . . . . . . . . . . . 8% 108
.
.

7.40%
.

Atchison, Topeka Santa Fe .. . . ..

&

. . . . . . . . . . . . 6% 96
.
.

General Electric 6.25%

_

. . . . . 8% in cash 156 9.12%

.
.

in stock
47%

Great Northern . . . . . . . . . . . . . . . . . . . . . . . . . . . .
‘'

103V
.

.
.

6.76°/
.....
.

a
Union Pacific . . . . . . . . . . . . . . . . . . . . .. 100): 13s
.

.
.

.
.
.

1400/:
.

Western Union Telegraph . . . . . . . . . . . .. . . . . . . 7% 93

.

7.52%
.

Westinghouse Electric Manufacturing . . . $3.50 45 7.77%

.
.
.
.

The new 7% preferred stock into which sound and desirable investments, which
the Armour notes are convertible should eventually should show profit of from
a

eventually sell at 110; so that here an four to ten points.

is

other instance of safety, six percent, and Superficially regarded, the second list
probable ten point profit. might present rather nondescript ap
a

Virginia-Carolina Chemical 6% de pearance. All these issues yield over

bentures due 1924, also sell at par. Four 7%, and some of them may shock the
years of unprecedented prosperity has staid investor. But careful analysis
a

placed these bonds in the conservative would demonstrate that every one of
investment class. The issue small, the these high yielding preferred stocks
is

is

equity large, sinking fund maintains

a

well_ protected by both asset value and

the price, and conversion privilege earning power. The three motor issues
a

into 8% preferred stock at 110 (below have

come through trying period with
a

the present price) carries prospects of a out hint of danger; their backing in fixed
nice profit. and current assets relatively larger than
is

In the railroad group, there are not many of the standard issues; and theirs
many issues yielding 6% which can 1s_an industry which peace
is

expected to
stand the acid test of analysis. The Mis stimulate rather than contract.
souri Pacific reorganization has been so In the same way, the tremendous
‘ equi
skilful and thorough, and the road’s re ties accumulated for the benefit of
such
cent exhibit so encouraging, that the as Republic pfd., American
stocl<s Loco
First and Refunding 55 due 1923 and
motive
Pfd., and Bethlehem Steel
the Iron Mountain devision refunding Pfd., 1n the past three years should 8%
carry
45 of 1929 can now be recommended them safely through
temporary period
a

without hesitancy. of depressron~if that in store—and

is
m
188 THE MAGAZINE OF WALL STREET
should ultimately be reflected in a per
manenlly increased earning power behind
the senior shares.
Common Stocks
The best investment
stock.
is a good common

The stockholder, as a partner in a

sound enterprise, may expect not only
an attractive return on his capital, but an
appreciation in value as the business ex
pands and a surplus accumulates. Many
an investor has remarked to the writer,
“I never buy stocks. Let the other man
speculate.
bonds.”
All my money goes into
equanimity.

trol
guaranteed.
The first two have come
through the ordeal of Government Con
unscathed-i.

dustrial developments.
we. with
The third can look forward
with especial confidence to coming in

Westinghouse is in much the same

position as General Electric, but belongs
rather to the second group because its
investment status is of more recent crea
tion. A long article could be
about the transformation wrought in this
company's affairs by the prosperity of
the war period. With negligible funded
debt and preferred stock, with current
dividends

assets available to liquidate its note issue

written

This is perhaps the best policy for

at maturity, Westinghouse comes into the
those who are unable or unwilling to
reconstruction period with practically no
exercise care in the selection and periodic
charges ahead of its common stock. Its
scrutiny of their investment. But num
7% disbursement has been earned with
bers have found to their cost that the
a greater margin than many bond inter
word “bond” contained no magic charm
est requirements, and a plentiful surplus
guaranteeing against loss—and others as
has been set aside to stabilize its dividend
they gained experience have learned con
policy, should any lean years intervene.
versely that “stocks” do not always sig
nify speculation. \Vestinghouse like General Electric pos
sesses limitless possibilities, and the
Conservative investments among com
mon stocks may be divided into two
stockholder need never fear that the
First, those that represent an claims of prior issues may at any time
classes.
endanger his interests.
unquestionably stable industry and pos
There is a dangerous fascination about
sess a long established dividend record.
Second, those whose prosperity is of
high yields which leads many experi
enced bankers to caution against them.
more recent date, but which are placed
.on a solid basis through the (practical)
It is perfectly true that unless shrewd
absence of prior obligations. judgment is exercised, the gain in income
return is likely to be offset by painful
Examples of the first type are Atchi

———I—I__
son among the rails, American Telephone
& Telegraph among the utilities, and
General Electric among the industrials.
The holder of these stocks can view the
past with satisfaction and the future with
losses in principal. Yet, given the op
portunity to investigate and select, six
per cent and safety becomes perfectly
feasible—a fact which it has been the
aim of this article to demonstrate.

WOULD YOU “FALL FOR” THIS OFFER?

The stock of an oil company, only two
months old, is being offered at 5 cents a
share upon the discernment of the pro
motcrs that they can already calculate an
annual dividend of 300%.
Stories of profits are always good
reading; one concern is publishing a
folder of letters from stockholders in
which they apparently give appreciations
for the extraordinary profits which they
have made in dealing with this individual.
A close inspection of the letters demon
strates that none of the writers state that
they have made any cash profits. They
estimate the difference between what
they paid for their stocks and what the
then market price is supposed to be—in
other words, their happiness is due to
paper profits.
Remember this: It is a disservice to
buy Liberty Bonds with the intention of
selling them; it is a disloyalty to trade
them in for unnecessary purchases or for
speculative purchases. — Samuel Crow
ther in System.