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By Root 2744 0

In comparison with prominent industrial companies as represented by the DJIA, they offered almost as good a record of past growth, plus smaller fluctuations in the annual figures—both at a lower price in relation to earnings and assets. The dividend return was significantly higher. The position of the utilities as regulated monopolies is assuredly more of an advantage than a disadvantage for the conservative investor. Under law they are entitled to charge rates sufficiently remunerative to attract the capital they need for their continuous expansion, and this implies adequate offsets to inflated costs. While the process of regulation has often been cumbersome and perhaps dilatory, it has not prevented the utilities from earning a fair return on their rising invested capital over many decades.

For the defensive investor the central appeal of the public-utility stocks at this time should be their availability at a moderate price in relation to book value. This means that he can ignore stockmarket considerations, if he wishes, and consider himself primarily as a part owner of well-established and well-earning businesses. The market quotations are always there for him to take advantage of when times are propitious—either for purchases at unusually attractive low levels, or for sales when their prices seem definitely too high.

The market record of the public-utility indexes—condensed in Table 14-6, along with those of other groups—indicates that there have been ample possibilities of profit in these investments in the past. While the rise has not been as great as in the industrial index, the individual utilities have shown more price stability in most periods than have other groups.* It is striking to observe in this table that the relative price/earnings ratios of the industrials and the utilities have changed places during the past two decades. These reversals will have more meaning for the active than for the passive investor. But they suggest that even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently excessive advance and can be replaced by issues much more reasonably priced. Alas! there will be capital-gains taxes to pay—which for the typical investor seems to be about the same as the Devil to pay. Our old ally, experience, tells us here that it is better to sell and pay the tax than not sell and repent.

TABLE 14-6 Development of Prices and Price/Earnings Ratios for Various Standard & Poor’s Averages,

Investing in Stocks of Financial Enterprises

A considerable variety of concerns may be ranged under the rubric of “financial companies.” These would include banks, insurance companies, savings and loan associations, credit and small-loan companies, mortgage companies, and “investment companies” (e.g., mutual funds).* It is characteristic of all these enterprises that they have a relatively small part of their assets in the form of material things—such as fixed assets and merchandise inventories—but on the other hand most categories have short-term obligations well in excess of their stock capital. The question of financial soundness is, therefore, more relevant here than in the case of the typical manufacturing or commercial enterprise. This, in turn, has given rise to various forms of regulation and supervision, with the design and general result of assuring against unsound financial practices.

Broadly speaking, the shares of financial concerns have produced investment results similar to those of other types of common shares. Table 14-7 shows price changes between 1948 and 1970 in six groups represented in the Standard & Poor’s stock-price indexes. The average for 1941–1943 is taken as 10, the base level. The year-end 1970 figures ranged between 44.3 for the 9 New York banks and 218 for the 11 life-insurance stocks. During the subintervals there was considerable variation in the respective price movements. For example, the New York City bank stocks did quite well between 1958 and 1968; conversely the spectacular life-insurance group actually lost