Chapters on the History of the Southern Pacific

by Stuart Daggett

Suspension of Central Pacific Dividends

It seems very likely that this unusual falling off in the receipts of the Central Pacific Railroad Company is to be associated with the exceptionally disturbed traffic conditions on the Pacific Coast during the four or five years beginning in the latter part of 1891. These were the years when the Traffic Association of California was conducting its violent attack upon the Huntington interests. The period was also marked by the dissolution of the Transcontinental Association, and by the construction of the San Francisco and San Joaquin Valley Railroad. It was not to be expected that a campaign such as has been described in previous chapters would fail to have an influence upon the receipts of a company interested in business in, to, and from the state of California, so that a disproportionate decrease in Central Pacific earnings was not surprising. However this may be, the effect of the decline in earnings was to force the Central Pacific to stop the payment of dividends; and the cessation of dividends, together with other elements of uncertainty in the situation to which reference will be made, eventually caused the price of Central Pacific and of Southern Pacific stock to decline.[513]

Dividend Policy

In respect to dividends a word should be said here, enough at least to make clear that the whole dividend policy of the Central Pacific was a matter which provoked criticism, and that this criticism grew acute at the close of the period we are discussing. As a general matter it was charged that the Central Pacific had no business to pay any dividends at all while its indebtedness to the United States government remained uncanceled. It was further alleged, with more show of reason, that the dividends of the eighties were declared in order to assist the associates in disposing of Central Pacific stock in Europe, and not because there existed any surplus to which they could be properly and wisely charged. Finally, enemies of the company asserted, and showed ground for believing, that the dividends set forth in the annual reports of the Central Pacific to its stockholders did not represent all dividends actually declared; they asserted that, in addition, by special arrangement, considerable sums were paid out in unreported dividends, which may or may not have reached all holders of the stock.

It appeared in this connection that a gentleman named Sir Rivers Wilson had come to the United States in 1894 as a representative of English shareholders.[514] Sir Rivers interviewed officers of the Central Pacific, inspected the property, and it was reported in the newspapers after his return to the East that he had arrived at a compromise with Mr. Huntington. The terms of the compromise were at first only vaguely understood, but the London Economist, in its issue of March 23, 1895, declared specifically that Mr. Huntington had undertaken to pay 1 per cent per annum in the shape of dividends until satisfactory legislation had been obtained for the adjustment of the Central Pacific’s debt to the government, and that he had also agreed to pay 2 per cent per annum for two years after the debt question had been settled, during which time the shareholders would have opportunity to review their position and to consider effecting an arrangement of a more permanent character.

Mr. Huntington’s attention was called to this statement of the Economist, but he made no denial of the facts stated. Three years later Mr. Huntington went further, and admitted that he had agreed with Sir Rivers Wilson to pay shareholders—all shareholders—an annual dividend of 1 per cent upon their stock.[515] It was understood that the money for the secret Central Pacific dividends was loaned to the Central Pacific by the Southern Pacific, although this detail was not authoritatively established.

Market Prices of Stock Shares

Neither the Central Pacific nor the Southern Pacific were ever investment properties under the Huntington régime, in the sense that a stable return could be expected by holders of their stock, or even in the sense that the selling price of their shares remained reasonably uniform or ever reached a quotation in the neighborhood of par. Central Pacific stock sold at 34 in January, 1885. It rose to 51 in 1886, fluctuated principally between 26½ and 42 during the years from 1887 to 1892, and then proceeded to fall in value until in the spring of 1897 it was quoted on the New York Stock Exchange at the nominal figure of 7⅛ per share. The stock was ordinarily not traded in to any extent probably because so much of it was held abroad.

Southern Pacific stock was listed on the New York market in 1885, but as has been explained in a previous chapter, quotations on the shares were for several years artificial. In 1890 the stock sold mostly between 25 and 35. It declined slightly during the latter part of 1890 and the early part of 1891, but from September, 1891, to August, 1892, most of the sales were between 35 and 40. Beginning in 1893 the price of Southern Pacific stock began to decline. In 1894 it reached 17½, in 1895, 16¾; and in 1897 it touched the low point of 13½. After 1898 Central Pacific stock left the market, but Southern Pacific stock recovered to about 50 in the middle of 1901, at which approximate price 46 per cent of it was purchased by the Oregon Short Line.