How Big?

A number of American corporations are so big that it takes some imagination to realize how large they really are. This can make sizing up whether to buy stocks in the company hard. The Bell Telephone System has more revenue and employees than the combined governments of New York State, New York City, and all of the city, county, and other local gov­ernments within that state. The largest corporations are exceeded in size by only one organization in this country, and that is the U.S. Government itself. Outside this country, no private organizations, and only a few of the governments, have as much revenue as some of the largest American cor­porations have.

Suppose, looking at whether to buy stocks, we say that to be called a "giant" a corporation must have property valued at a billion dollars. How many companies are this big? In 1956 there were about seventy. Not including financial institutions such as banks and life-insurance companies, the largest four corporations were Bell Telephone, sixteen billion dollars; Standard Oil of New Jersey, eight billion dollars; General Motors, 7 billion; and U.S. Steel, four billion. The next five, each having two and a half billion dollars or more, were Ford Motor, Gulf Oil, Socony Mobil Oil, E. I. duPont, and the Texas Co.

One reason why a corporation can be so large is that its operations cover so much territory. In any one city a moder­ate-sized company may look big because its activity is con­centrated locally. But the American giants do business in a great many locations. The Bell Telephone System has 9,000 "central" offices. General Motors sells its automobiles through local dealers in almost every town in the United States, and in many places abroad. The Metropolitan Life Insurance Com­pany has 20,000 sales agents scattered throughout North America.

Something to consider when looking to buy stocks, the largest American oil companies do not have retail dealers everywhere in this country, but they operate in many foreign areas. They have petroleum wells in the Caribbean and the Persian Gulf areas, and they sell in parts of every continent of the world. It is likely that in foreign fields, Amer­ican corporations are still in their infancy; in the future a typical giant corporation may operate throughout the world, with most of its volume outside the United States and its size several times as large as today.

When looking to buy stocks, bigness impresses most of us, and we like to be associated with large and prominent organizations. Doubtless this comes from an animal instinct for self-preservation. When we hear that a business is large, we assume that it is now, and will continue to be, more successful than a small firm. The facts may largely justify this feeling. A corporation that has grown until it has hundreds of thousands of employees, and has property valued at billions of dollars, is self-evident proof that it has enjoyed some degree of good management.

Consider this when looking to buy stocks, a giant corporation, if well organized, has several execu­tives, each of whom is capable of filling the chief officer's job. This means that the company cannot be greatly disturbed by the loss of one or two officers. An investor can get more in­formation about a large corporation. Government regula­tions do not require a small firm to furnish as much data as large ones must. And beyond the government require­ments, a big outfit with several hundred thousand stockhold­ers knows that it must tell enough to satisfy its present shareholders, and to cause more investors to join. Also, be­cause investors are more apt to be interested in the prominent corporations, a broker or dealer or adviser on stock keeps himself better informed on those companies.

Buying stock in a small company is more of a gamble both in the lack of information on its present condition and in estimating its future chances. If a company, now small, be­comes highly successful, the value of a share of its stock will rise further than is possible in a larger concern. On the other hand, a small business is more likely to do poorly, or even to fail completely, as thousands do every year. So if an investor limits his choice to one of the two extremes, either a giant or a baby, he is much safer in buying stock in the giant. But nobody compels him to go to either extreme.

Former Giants

When looking to buy stocks, it can help before you get completely immersed in the current stocks to consider what has happened to former giants. Back at the beginning of this century, the big American corporations were mostly railroads and the manufacturers of steel rails for them. Canal and riverboats generally had stopped running; paved roads did not reach beyond city limits; automobiles were novelties; airplanes had not begun to fly. Passengers and goods to be transported more than a few miles overland went to the nearest railway station as a matter of course. Any growth in other forms of business auto­matically caused an increase in railway traffic. Today, using hindsight, it is easy to see that at the turn of the century the railroads were near their peak and soon to start a long decline in relative importance.

To show the effect on a stockholder, let us look at the history of average prices of common stock of twenty-five rail­roads and twenty-five industrial companies as published by The New York Times. This record started at the first of 1911. Thirty years later, at the end of 1940, the average price of the rails had dropped almost to one fifth of what it had been at the start, whereas the average of the industrials had more than doubled. After that the comparative record of the rails improved, but at the end of 1957 their average price was about one fourth less than the starting price, whereas the average of the industrials was over seven times as high as at the start.

Suppose that in 1911 an investor bought stocks of several railroads because they were then the largest, most prominent corporations, and that he kept that stock for a long time. The above records indicate that he got much poorer results than if he had bought stock in companies much smaller at that time and engaged in other activities.

Today in the field of land transportation, most of the large companies are manufacturers of highway motor vehicles or refiners and distributors of fuel and lubrication for those ve­hicles. These companies, in 1959, are so firmly established that an investor might naturally assume he can wisely buy stock of one of them, put it away, and forget it. But the larg­est automotive manufacturers and oil refiners are no more strongly entrenched today than the leading railroads were fifty years ago.

Large but Not Giant

When looking to buy stocks, because so much is said and written about the giants, an investor may easily fail to notice the other large companies. But a major feature of American business organization is the numerous corporations, each one large compared to the aver­age, but small alongside the giants.

In 1952 about 13,000 American corporations had at least five million dollars of assets. Now a business with five million dollars in property is presumably well beyond the nursery stage. But to avoid getting bogged down with large num­bers of companies, suppose we limit ourselves to those hav­ing at least fifty million dollars of assets. A business with this much property probably has several thousand employees and a few thousand stockholders. How many are that big? Over 1,500 of them in the United States.

Obviously an amateur investor cannot possibly choose in­telligently among 1,500 stocks. But let us defer this prob­lem. The point right now is that the United States contains a great many large corporations, most of them with names that mean little to us; but still they are successful, established companies, and quite possibly their stocks are good invest­ments.

The little matter of price per share is a reason for looking beyond the leading names. When an already prom­inent company is expected to do well on future earnings, it attracts much attention from speculators and investors, includ­ing some who own or manage large blocks of capital. In their desire to get in on a good thing, these people may run the price of the prominent stock up too high, as compared to the stock of less well-known companies that also have good prospects for earnings. Because of high price, a stock may be a much less desirable investment today than it was at some time in the past.

Massachusetts Investment Trust is one of the oldest and largest of American investment companies. Being itself in the billion-dollar-asset class, how much does this trust rely on the other giants in putting its investment policy into effect? In 1955, the trust evidently considered most of the giants to be high-grade investments, but it turned down a third of them in favor of other large companies. (Incidentally, the trust's policy of broad diversification required it to own stock in a list of companies long enough that this alone caused it to look well beyond the giants.)

Under largely the same management as this trust is a company called Massachusetts Investors Growth Stock Fund. The trust and the fund are alike in limiting their investments to common stocks. The word "growth" in the fund's name implies that it selects stocks expected to do exceptionally well in the future, although current dividends may be low. In 1955 only one tenth of its stock values were in stock of giant corporations, and most of those were life-insurance companies. Apparently the fund managers believed that outside the life-insurance industry very few of the giants had future growth prospects as good as those of quite a few other not-so-large corporations.

Here is why the future growth in dividends on a share of stock is unlikely to amount to as much in a larger company as in some smaller ones. Suppose two companies, equally well managed, are paying dividends at the same rate per share, a dollar a year. Then each company opens a new line of profitable activity, which enables it to pay out an additional million dollars a year in dividends. But here is the difference: the larger company has twenty million shares of stock out­standing, so that the additional dividend per share is five cents, an increase of 5 per cent, whereas the smaller com­pany has only a million shares, and its additional dividend per share is fifty cents, an increase of fifty per cent.

When looking to buy stocks, bigness has its advantages for an investor, but he need not wear self-imposed blinders that prevent him from seeing anything but a few giants.