everything up but ne# income after taxes JOHN F. BOHMFALK, JR., Clark, Dodge 8 Eo., N e w York, N. Y. JAMES M. CROWE, Executive Editor, Industrial and Engineering Chemistry, Washington, D.C.
T h e chemical process industry, as represented by I&EC’slist of 100 companies, has made striking gains in the past 2 yeara. Total asseta are up 30% in 1951 over 1949 as retamed earnings, depreciation, and outaide Bources of new oapital have heen plowed into the greatest expansion in the history of chemical industry. The compariwns with 1939 am even more striking. Total assets have nearly tripled, while the investment in 6xed assets-plant and equipment a t original c o s t w a s very nearly 2’/, times the 1939 level. Of eoune, it must be realized that the seriously declining value of the dollar should be taken into consideration. The chart on the next page shows how the dollar’s value bas declined from 193639 average of 100 to 45.5 in 1951. The tax burden on industrial corporations has reached staggering proportions. In 1951 federal income taxes preempted 51% of earnings, while in 1939 the take was 16%. In 1939 I Q EC’s l i t of 100 chemical process companiespaid $145,000,OOO in federal income taxes. In 1951 they paid $2,990,000,OOO,a twentyfold increase. Notwithstanding, net income for the chemical process industry in the l a k t year was 4 times net income in 1939, and registered a 40% gain since 1949.
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INDUSTRIAL AND ENGINEERING CHEMISTRY
r
According to reporb of the Securities and Exchange Cammission and the F e d 4 %de CommisSin the “Chemical and Allied P d u c t a ” group paid federal income taxes a t the rate of over 6w0of 1951 earnings. Average for all manufacturing corporations was 52%. The principal reaeon for lower rate of I&EC’s selwted list of 100 companiea is that a number of petroleum companies are included. Their allowance for depreciation of mineral merves makes their tax rate lower and depresses the average. For example, Du Pont, Daw, and Monsanto paid federal income t9x at rata of 62 5% of their combmed earnings, while Atlantic Whg,Standard Oil of N. J.. and the Texas Co. paid a t the rate of 36%. The generation of funds and their disposition during 1950 and 1951 make an interesting study. From the composite figures, the usual sources of funds provided $5.1 billion-bout $3 bjlljon from retained earnings and 52.1 billion from depreciation. On the other side of the ledger, net working capital increased 51.5 billion, and an additional $3.9 billion was invested in new production facilities, for a total disposition of $5.4 billion. The gap of 5.WO,ooO,oM) between the inflow of funds and the outflow was closed largely by d e of miscellaneous investments and by new financing. Additional borrowing of ~ ~ , ~ , as 0 well 0 0as an indeterminate amount of equity financing may be deduced from the composite totals. Traditionally, chemical industry has relied heavily on financing internally from funds generated in ita operations. But the crushing tax burden, yupled with the magnitude of the present expansion programs, has changed the industry’s way of looking a t finance. While equity capital is still the preferred instrument of financing and comprises the greatest proportion of the industry’s Capitalization, a certain amount of debt in the capital structure is no longer looked at askance, as in the past. Although money borrowed must be repaid, such a source of capital is the cheapest type available. And many companies in the industry are forced to borrow in order to keep up with the competition! An examination of the current ratio of the 100-company composite sheds some light on the industry‘s financial problems. The steady decline in this ratio points clearly to the fact that the chemical process industry is currently financing operations with tax moneyi.e., cash which will presently be owed to the Government. The indication is that continued resort to external sources of funds willtharacterize the CPI in future years. With respect to net income, earnings as a percentage of sales reached a peak in 1950, even in the face of substantial
VALUE OF THE WLULR
CAPITAL AND WORTH UIICns si d o l m
IS
-‘
10
i
Vel. 44, No. 6
I
SALES AND PLANT INVESTMENT
OPERATING INVESTMENT Ullimr of dlllon
$1.48
I
N+
I-
$1.34
$137
1949
1950
$18
i
L ‘51
1939
1951
.
INDUSTRIAL A N D ENGINEERING CHEMISTRY
June 1952
incream in the federalincome tax rates. A further tax k t in 1951, together with a return to more normal c o m e r buying after the postXorea splurge, held net income to a relst i d y low percentage of des. If the petroleum companies were excluded, the net income showing would be more diacouraging. Profit margins before taxes make more encouraging readii and suggeat that the CPI d e a Btrong attempt to overoome the &e& of mflstion. Profit margins were:
-.
Comporils
Federal Income Taxes
Year
Prqm Mmgin, $5of Sales
heoms before Taxea
1939
10 6
16 5
1949 1950 1951
11 1 15 5 16 4
31 9 40 5 51 2
%of
While the net income record shows a strong progression, an analysis of this record must take inflation into account. The figures with which we deal am elastic dollars, which are not truly comparable from one period of time to another. The management of these d o h requires a great deal of skill to asaure the proper functioning of the business and to prevent erosion of the stockholder's investment. "he following ratios point out some of the trends over the 1939-51 period. Sales p e ~ $1 of
Year
Cross Plant
1939 1949 1950 1951
50.78 1.34 1.37 1.48
.'"
DIVIDENDS BehR
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4
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3
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0
193)
hmd
IkECr blicled Lnt d Io( Chemical h e n Cmpnles
Net Working Ca#ital $4of sales % of grors plant 41.2 26.9 26.8 24.6
31.8 35.9 36.4
36.5
The divergent trends in net working capital requirements may be matched with the growth in sales per $1 of gross plant. The @res may be interpreted to mean that the CPI have booated d e s turnover per dollar of plant investment (dea am inflated dollars while much of plant investment is costed &B 1939 dollars) and also per dollar of working capital bv removinz owduction and distribution bottlenecks, d e &oping coat reducing proeeases, and operating close & the vest with working capital. Certainly, higher construction costa and the necessity of carrying larger inventories-the direct products of inftation4ave forced close 6nancial control. Depreciation charges bear a direct d a t i o n to the value of fixed assetei.e., plant and equipment at origins1 cost. As I
1205
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TAXES AND INCOME (IS
01 dilhn
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Vol. 44, No. 6
INDUSTRIAL A N D ENGINEERING CHEMISTRY
1206
DEPRECIATION Yillim of dilbrr
h.,.",
chemical markets, sucb newer products as the synthetic fibers, polyester and polyethylene plastics, and pharmaceutical specialtic8 are largely unaffected. Thue, future sales grnwth will depend to a great extent 011 the development of new products. The past annual growth rate, as shorn in the table, is certainly no key to the future. Mathieson's 35Y0 annual sales growth, for example, reflects eeveral important acquisitions of and mergers with other chemical companies. Pfizer's 25% may he lagely attributed to the tremendous growth rate of sntihiotics. Investor's Viewpoint
the table shows, the percentage relationship is essentially constant, as the B u m u of Internal Revenue has maintained a vigorous depreciation schedule for various c l d c a t i o w of 6x4 asseta. Doubtless, accelerated amortisation under certificates of necessity will begin to make substantial additions to the depreciation charge in 1952. But to the vociferous anguish of chemical industry leaders, depreciation is still accrued largely in terms of prewar dollar values, as illustrated in the table in its relation to sales. While depreciation s t i l l fulfills its theoretical function of returning capital tax-free, the capital 80 returned is today no longer sufficient to provide for new plant and equipment of an equivalent capacity. And again, the obsolescence factor which is ever-present in the CPI is not a recognized part of the statutory depreciation schedules. Depreciation Year
Yoofgrossplant
1939
4.3
1949 1950 1951
4.9 4.7
5.5 3.7 3.5
4.7
3 2
% of
sates
Chemicals Manufacturing Companies
Aseets and sales for a group of 20 chemical manufacturing companies have shown a marked change over the 1939-31 period. This group is conlined exclusively to a major segment of the chemical industry proper. To a great extent, several companies which might have been e l d e d as small in 1939 have shown great percentage gains in sssets and sales. Dow and Ptiser are outstanding examples. On the other hand, such industry leaders as Du Pont and Union Carbide, starting as large companies in 1939, have nevertheless quintupled d e s , a fine performance by any standard. All during the 1939-51 period, economic conditions have been exceedingly favorable for acdemted growth of the chemical industry. For the most part, the industry and ita leaders have seized their opportunity to construct new c% pacity at an unprecedented rate. The emphasis in the 1950's seems to be following first the construction of capacity for basic chemicals production, to be followed perhap by even greater emphasis on tmhnologiddvancminnewerfields, such as coal hydrogenation, fluorine-and acetylenederived chemicale, titanium, and several fields of medicinal chemicals. For it is certain that even in the face of current weaknesses in
From the investors' viewpoint, one share of common stock held in each of the 100 chemical process companies would have proved a very satisfactory investment if made in 1939. B e c a w some companies did not have stock listed or available for public investment in 1939, the composite Sgures for that year do not include the full list of 100 companies. Nevertheless, with certain assumptions, it is possible to say that the investor received in 1951 an average dividend of $2.27ashareofstock,morethandoublellis 1939dividend, fora yield of 8.2% on his origiial investment. His investment bas appreciated about 73% in value during the 12-year period, and in fact, his dividends accumulated during this time have amounted to about 75Y0of the original investment cost. Other interesting facts may be gleaned from the 100 company composites. For example, dividend payout amounted
L l N A N C l A L GROWThirty-six companies having m a t rapid growth in net sales during period 1939-51. Selected from I&EC'S list of 100 chemical process companies NET SALES Per cmlI"c.ealc Thousands Booedon VoIuroJ 01 Dd/arr -- 1951 1939 1939 1951 ddlor dollop
Schsnlsy Industries, Inc.. Cb.. m e r & co.. 1nc.. St. Ragis Paper Co.. Dor Chemlcal Co.. Tenne88ee Rod. and Chem. Distillers Corp.-Scaplms 1Yinnc8ot. Mining & lug. R8YOUk1, h C . . Y8thi080n Chemlcd COrp. Rational Di8tillen.. Abbott Laboratories.. CaWiD Corp. of America. Linduy Llght & Chsm.. Hooker Blecaorhcmlral uu.thon Corp.. Dote. pluth & Chem. ~ O M m t O Cbemlcal CO.. Rttibwgh Coke & Chemlul co.. F i r d n a Tire & Rubber Amdcan Home Roducts UsnL and Co., Inc Rohm & H u s Co.. Cornins G h a Works.. Cshnsss Corp. of America Publicksr Industries, Inc.. Dewey & Illmy. Heyden Chemical Corp.. InterrUtionrlYin. CChsm. Kopprn Co.. Inc.. Goodyeu Tire & Rubber Union Carbide & Carbon phllllps Petroleam Co.. Industria Rayon Corp.. Eaalea Powder Co.. Chrmpdon Papar & Fibre E. I. dn Pant de Ramours
. ..... ......
......... ......... .. ........
. .............. ...... ...... ..
........ .
....... ..
.....
33,868 6,190 15,359 26.762 2,430 84,788 17,345 10.049 10,967 59,171 11,485 1,768 522 5,673 13.298 3,137 42,983
s150.576 1.770 754 100.263 1,520 667 ic~s.956 i, .. 2. m~ 403 ~ ~ ~ . ,. . . ... 339.588 1.160 474 26;186 1;019 409 786.023 825 321 170,068 800 312 83.774 734 278 91:234 725 273 464&1 692 250 84,364 662 245 15,412 659 239 3,870 641 237 39.688 600 218 91,553 588 216 20,733 561 201 272.845 535 188 ~~
7,913 48,W 160.119 975,766 31.668 192,398 20.061 ;120,269 14,020 106.896 20.041 115.750 35.479 202.651 29.243 166,791 29.183 5.m 5.212 29,830 11.712 64,258 52;119 287,954 200.102 1,101,141 170,347 927,520 112.929 610,004 12.265 64.059 41.010 216,849 20.183 106.380 298.833 1,545,653
1951 dollar vdusd st 45.5% of 1030 dollar.
515 509 508 500
485 478 471 476 474 472 464 454 450 443 439 433 429 427 418
~~
180
177 176 173 170 I63
160 162 161 160 157 152 151 148 146 142 141 140 135
BuKd on wholeinlo prioa
averew,.l935-39. U. 8. Department of Commerce.
-
,-
June 1952
INDUSTRIAL A N D ENGINEERING CHEMISTRY
%TOCK PRICE AND EARNINGS U T I 0 Ddkn
to 61% of net income in 1939, but had dipped to 43% and 47% in 1950 and 1951, respectively. The retention of a larger proportion of net income in the 1950's is dictated by the economic facts of life. But the funds so r e ~ r v e dare reinvested in the company for the stockholder's ultimate benefit. Pricesamings ratios reached a h i point in 1939,and we can a~wunethat a low wna made during the early war years;
laM
mbsequently, rising market p r i m brought the price-eamings ratios up wmewhat, but they am still below the 1939average. Msny factors mwt be carefully considered by the investor in purchseing common stoeks, but generslly those companies' which have grown the fastest have g e n e d y rewarded the investor handsomely. Investments in many chemical companies made within the past 26 yeam are now worth many times the o r i g i i cost. According to the Chemical Economics Handbook of Stsnfod Research Institute, the appreciated value plue accumulatad dividends of 81000 invested in common stock on Dee. 31, 1935,would have been as follows on Dec. 31,1950,for these companies selected a t random. Hooker Electrochemical Co. u8.m Minnwta Miniug & M M UCo. ~ 15,748 ~ Merclr & ca,Inr 12,085 Abbott Iaboratories 7,286 I Celmese Corp. ot Amedu Heyden Cbemical Corp. ! Dewey and AImy Chemical Co. 5,317 € I d e s h w d w Co. 4,138 Dow Chemical Co. 3,967 Amdun Cyuumid Co. 3,293 Dlonsmto Chemical Co. 3,133 Union Carbide and Carbon Cow. 3,018 2,759 Standard Oil Co. (New Jersey) Allied Chemical & Dye Corp. 2,244
The chemical process industry generates its growth from within by application cf research and development. So long 88 economic conditions are generally favorable, continued growth ean eafely be predicted for a long time to come.
I N D U S T R I A L A N D E N G I N E E R I N G CHEMISTRY
Fi~#ancialPicture of Manufacturing I&uatr&?s NET INCOME PER D O U R OF NET WORTH
Vol. 44, No. 6
...
EARNINQS DISTRIBUTED 199 19k7-49
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62.
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194749 6.9
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