III. Convertibility. It is difficult to speak of the convertibility of public-utility bonds as a class for the reason that they differ widely from one another in this respect. In general, it is certainly more difficult to dispose of public-utility bonds than railroad bonds. They do not possess sufficient convertibility to justify their purchase by any one who may need to realize quickly on his holdings.
IV. Prospect of Appreciation in Value. Public-utility bonds, except such issues as are convertible into stock, possess little prospect of appreciation in value. It was pointed out above that depreciation is not properly allowed for, and it is very difficult for the securities to advance in the face of this obstacle.
V. Stability of Market Price. The bonds of public-service corporations are relatively more stable than railroad bonds because their earnings are not subject to the fluctations which occur in railroad properties between years of prosperity and years of depression. At the same time, it should be pointed out that their stability of price is largely fictitious, owing to the comparative inactivity of the issues. In other words, while the quotation may be maintained, it is usually difficult to sell any large quantity of a public-service corporation's bonds in a period of financial disturbance, while railroad bonds are more easily liquidated even if at a sacrifice.
The question remains, do public-utility bonds afford a desirable security for the investment of a business surplus and of private funds? In regard to the former, it may be said at once that public-utility bonds do not meet the necessary conditions. The security is too doubtful, the convertibility is too small, and the stability of price too uncertain.
For private investment the case is somewhat different. Keeping in mind the desirability of diversifying investments and admitting the attractiveness of investing in a class of property whose earnings are comparatively stable, it seems clear that public-utility bonds can not be dismissed without consideration. When a company is found whose property is substantially equal in real value to its bonded debt, whose allowance for depreciation is ample, whose franchises are satisfactory, whose earning capacity is large, and whose management is capable and upright, the investor is justified in giving careful consideration to its issues. Unless all these points are found to be satisfactory, however, the investor should content himself with some other form of security. For some years to come it is to be feared that many of our public-service corporations will suffer from the war of discordant elements—disregard of the rights of the public on the part of the management and socialistic agitation for control on the part of the community. Until these warring factions are reconciled and the questions at issue adjusted with fairness to the security-holders and the public, the investor should be most prudent in his purchases of public-utility obligations.
VII
MUNICIPAL BONDS
The previous chapters have considered, in turn, the investment value of railroad bonds, real-estate mortgages, industrial bonds, and public-utility bonds. The desirability of each of these different classes of security has been judged in accordance with the general principles laid down in the introductory chapter; that is to say, each class has been analyzed in relation to safety, rate of income, convertibility, prospect of appreciation in value and stability of market price. The same determining factors must now be applied to a judgment of government, State, and municipal bonds.