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Information > Financial Terms > This page Guaranteed Stocks Shares
of stock, preferred or common, the payment or dividends on which have
been guaranteed by a corporation other than the issuer.
Guaranteed stocks arise under much the same circumstances as GUARANTEED
BONDS, but they are particularly found in railroad finance, although occasionally
they occur among public utilities. Guaranteed
RAILROAD STOCKS arise by reason of one railroad company's lease of its
property to another, under the terms of which the lessee railroad guarantees
the payment of dividends at a stipulated rate on the stock of the lessor
corporation. In default of
payment of dividends or dis-affirmance of the lease, the lessor may take
back its property, in addition to having claim for the default upon the
lessee. Leased line stocks
particularly arose during the era of expansion of U.S. railroads when
the major trunk lines found it necessary to resort to leases for the acquisition
of divisional or branch mileage, such leases running for very long terms. Dividends
on guaranteed stocks are part of the fixed charges of the lessee company
operating the property, and thus such dividends are a charge on the gross
income of the operating or lessee company ranking with the interest on
the operating company's own bonds.
Consequently they are a charge ranking prior to the operating company's
own dividends. Failure to
pay the guaranteed rate abrogates the lease.
In the final analysis, the importance and essentiality of the leased
line to the lessee are determining factors in continued interest of the
lessee in the leased line. In
some railroad re-organizations of the late 1930s, reduction in fixed charges
of railroad debtors involved dis-affirmance of some leases on lines whose
importance and essentiality to the system had declined over the long term. Thus
railroad guaranteed stocks are rated, among other factors, on the essentiality
of the leased line to the lessee in modern times.
The seasoned and better quality guaranteed railroad stocks sell
on a yield basis comparable to the higher-grade railroad bonds of the
lessee systems, with which they are comparable because of the fixed nature
of the lease obligation. Erroneously,
preferred stocks having no connection with guaranteed dividends are sometimes
referred to as guaranteed stocks, although preferred dividends, even if
cumulative, are in no sense guaranteed by the issuer in the absence of
specific guarantee. Back to Information |