Preferred Profits

Many a U.S. corporation makes fancy future savings nowadays by buying its own preferred stock at fire-sale prices. The New York Stock Exchange this week reported that in August alone 30 Big Board companies were reacquiring their own preferred stock--usually at prices far below par. And all over the U.S. thousands of smaller concerns were busily picking up their own preferred at discounts of 10 to 75% on the dollar. Examples:

> So far this year Gillette Safety Razor has bought 9,049 shares of its preferred stock (redeemable at $105 a share). Price paid: $40 to $57 a share. Besides saving $45,245 in annual preferred-dividend requirements, these purchases also increase the equity of all shareholders by $435,000 --more than one-half second-quarter profits.

> In the first half of this year giant Republic Steel acquired 3,523 shares of its 6% preferred (redeemable at $110), mostly at prices below $98 a share. Although a relatively small saving, Republic thinks the deal a good one, last week set aside $300,000 for additional purchases.

> Little Willys-Overland was so broke before the war that it paid no preferred dividends in eight of the ten years ended 1941. But now things are better and it has bought 34,300 shares of its $10 par preferred since May. Prices paid: $5 to$7.50.

> Atlantic Gulf & West Indies S.S. bought 15,468 shares of its $100 par stock in the five months ended August at $40 a share or less--for a bookkeeping profit of at least $925,000--50% more than the total of its real profits from steamship operations in the first six months.

Until the tax laws are changed there is little reason for a company to buy its own bonds below par. Reason: the Government siphons off most of the paper profits in hard cash taxes. But a quirk in the law leaves profits on preferred stock retirement untouched (unless the company buys to resell at higher prices). Thus A.G.W.I. earmarked $414,000 for Federal income taxes in the first half, but will not pay one penny on its $925,000 paper profit in buying back its own preferred stock.

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