Forbes Magazine: “Is American Business Worth More Dead than Alive?” by Benjamin Graham (1932)
When Benjamin Graham’s three part series, “Is American Business Worth More Dead than Alive?” was published in Forbes magazine, America, and indeed the world, had gone through the punishing stock market crashes of 1929 and 1930 and was in the depths of the Great Depression. Though the Depression continued until nearly the end of the decade, Benjamin Graham’s articles signaled to investors that it was now safe to return to the stock market. At that time, Benjamin Graham pointed out, more than 30 percent of the companies listed on the NYSE were selling at less than what they would be worth if they were broken up and sold. In this series of articles, Benjamin Graham took corporate management to task for taking advantage of investors and putting their own welfare ahead of that of the shareholders.
FORBES published a series of three articles by Benjamin Graham written at the bottom of the Great Crash. This is the first, Are Corporations Milking Their Owners?
At its worst level, the Dow dropped to 40.56 in July, 1932. That is a drop of 89%.
Inflated Treasuries and Deflated Stockholders (Article 1) by Benjamin Graham on June 01, 1932
SELLING AMERICA FOR 50 CENTS ON THE DOLLAR
More than one-third of all industrial stocks are selling in the open market for less than the companies’ net quick assets1.
Scores of common stocks are selling for less than their pro-rata cash in the company’s treasury.
Corporations who are good risks for commercial loans do not need to borrow. They still have large unused cash balances furnished by their stockholders in the New Era days.
Corporation treasurers sleep soundly while stockholders walk the floor.
Banks no longer lend directly to big corporations. They lend to stockholders who have over-financed the companies through rights to buy stock at inflated prices.
What the responsibilities of the corporation, its directors, its stockholders? What is the proper way out? Are stockholders part-owners of their companies, or just suckers?
Shall companies reverse the 1929 method—give the stockholder rights to sell back the stock he bought, reduce capitalization, and equalize the burden between the corporations and the stockholder?
If market quotations discount huge cash reserves due to probable long continued future losses then should not the stockholder demand liquidation before his money is thus dissipated?
Are corporation playing fair with their stockholders?
Suppose you were the owner of a large manufacturing business. Like many others, you lost money in 1931; the immediate prospects are not encouraging; you feel pessimistic and willing to sell out–cheap. A prospective purchaser asks you for your statement. You show him a very healthy balance sheet, indeed. It shapes up something like this:
The purchaser looks it over casually, and then makes you a bid of $5,000,000 for your business–the cash, Liberty Bonds and everything else included. Would you sell? The question seems like a joke, we admit. No one in his right mind would exchange 8 1-2 millions in cash for five million dollars, to say nothing of the $28 millions more in other assets. But preposterous as such a transaction sounds, the many owners of White Motors stock who sold out between $7 and $8 per share did that very thing–or as close to it as they could come.
The figures given above represent White Motors condition on December 31st last year. At $7 3/8 per share, the low price, the company’s 650,000 shares were selling for $4,800,000–about 60 per cent of the cash and equivalent alone, and only one-fifth of the net quick assets. There were no capital obligations ahead of the common stock, and the only liabilities were those shown above for current accounts payable.
The spectacle of a large and old established company selling in the market for such a small fraction of its quick assets is undoubtedly a startling one. But the picture becomes more impressive when we observe that there are literally dozens of other companies which also have a quoted value less than their cash in bank. And more significant still is the fact that an amazingly large percentage of all industrial companies are selling for less than their quick assets alone–leaving out their plant and other fixed assets entirely.
This means that a great number of American businesses are quoted in liquidating value; that in the best recent judgment of Wall Street, these businesses are worth more dead than alive.
For most industrial companies should bring, in orderly liquidation, at least as much as their quick assets alone. Admitting that the factories, real estate, etc. could not fetch anywhere near their carrying price, they should still realize enough to make up the shrinkage in the proceeds of the receivables and merchandise below book figures. If this is not a reasonable assumption there must be something radically wrong about the accounting methods of our large corporations.
A study made at the Columbia University School of Business under the writer’s direction, covering some 600 industrial companies listed on the New York Stock Exchange, disclosed that over 200 of them–or fully one out of three–have been selling at less than their net quick assets. Over fifty of them have sold for less than their cash and marketable securities alone. In the Appendix at the end of this document is given a partial list, comprising the more representative companies in the latter category. What is the meaning of this situation? The experienced financier is likely to answer that stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, “in times like these frightened people give the United States of ours away.” Or stated differently, it happens because those with enterprise haven’t the money, and those with money haven’t the enterprise, to buy stocks when they are cheap. Should we not find the same phenomenon existing in previous bear markets–for example, in 1921?
The facts are quite otherwise, however. Stocks sold at low prices in the severe post-war depression, but very few of them could be bought on the Stock Exchange for less than quick assets, and not one for less than the company’s available cash.
The comparative figures for both periods, covering representative companies, are little short of astounding, especially when it is noted that they showed no materially poorer operating results in 1931 than in 1921. Today, these companies are selling in the aggregate for half their working capital; ten years ago working capital was only half the bottom prices. With respect to cash assets alone, present prices are relatively six times lower than in 1921.
We must recognize, therefore, that the situation existing today is not typical of all bear markets. Broadly speaking, it is new and unprecedented. It is a strange, ironical aftermath of the “new era” madness of 1921-1929. It reflects the extraordinary results of profound but little understood changes in the financial attitude of the people, and the financial fabric of the country.
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