Strictly speaking, there is no such thing as a nonspeculative stock. The moment you take a position in a stock you are speculating, sometimes without realizing it.

From time to time the market returns for "safety" to such classic defensive securities as utilities, food, department stores, etc., when the economic weather is getting rough. They generally hold up better in a bad market, though sometimes only a shade better. For instance, on September 27, 1960, while the Dow-Jones Industrial Average dropped 1.38 per cent to close at 577.14, the Utility Average was doing only 0.16 per cent better by going down 1.22 per cent to 92.48.

There is actually no investment which is decline-proof or risk-free. Real estate, for example, especially in the form of home ownership, is generally considered a safe investment, though investing in residential properties is not necessarily any safer than buying securities. There are at least half a dozen types of securities, such as banks, insurance companies, finance companies, etc., which should be just as, if not more, safe than real estate investment, if safe is taken to mean reducing investment risks.

Despite inevitable speculation, there is, for conservative-minded investors, still a choice between less and more speculative securities. Nobody is likely to dispute you in classifying an insurance stock as less speculative than, say, a space-age stock.

An insurance stock is the nearest to a "defensive" stock that I can think of. In the opinion of Mr. Shelby Cullom Davis, chairman of the Insurance Securities Committee of IBA (Investment Bankers Association of America), the securities of the insurance industry offer yield, growth or any combination of them in varying degrees. They also offer a degree of stability in dividend return unmatched by securities of any other industry over the past century or more. This stability is based on the breadth of diversification of the primary business—insurance. And more importantly, perhaps, on the diversification of the invested assets of the industry, which are a cross section of the best investments in all other industries.

You will see what that means by just glancing at the enormous stock and bond portfolio of a single insurance firm, Continental Insurance. According to a Capital Gains Research Bureau report dated March 18, 1960, Continental's holdings of bonds totaled $448,864,935; preferred stocks, $35,621,067; common stocks, $858,865,527. Among some of its bigger common stock holdings were AT&T, 375,900 shares; IBM, 146,384 shares; G.E. 274,800 shares; du Pont, 123,000 shares; Eastman Kodak, 137,900 shares; GM 249,500 shares; Corning Glass, 76,250 shares; National Steel, 147,500 shares; Gulf Oil, 536,782 shares; Shell Oil, 154,670 shares; Union Carbide, 172,000 shares; Standard Oil of N.J., 777,445 shares; U.S. Gypsum, 135,000 shares; Texaco, 294,576 shares; Amerada, 147,100 shares; First National City Bank of New York, 229,450 shares; Morgan Guaranty Trust Co., 117,900 shares; Hanover Bank, N.Y., 256,500 shares. And the beauty of Continental shares (listed on the New York Stock Exchange) was that they were selling at a considerable discount from their liquidating value (in March) of $80.09 per share.

Naturally, even such quality common stocks as those in Continental's portfolio have fluctuated in market values. They constitute about 65 per cent of Continental's investment portfolio worth over $1 billion, with the remaining 35 per cent in bonds which provide substantial built-in stability.

The insurance industry has displayed a clearly defined growth trend, with total assets that have more than doubled over the last ten years. Premiums written increased from $4.8 billion in 1949 to $9.1 billion in 1958 while investment income advanced from $2.5 million to $489 million.

For the major life insurance companies, the only big cloud on the horizon is the permanent income tax imposed upon the industry in 1959. Unpleasant though it is, this increased tax burden is at least constructive in removing the industry's tax uncertainties. As for fire and casualty insurance stocks, they seem definitely to be turning the corner for the better. Basically they have been so thoroughly deflated, marketwise, in the past five years that almost all of them are selling well below book values. They should obviously be bargains if underwriting profits should return in their cycles of fat and lean years. The cycle works this way: When underwriting loss is found to exceed profits, premium rates are usually adjusted higher. However, there is always a time lag in adjusting premium rates. This time lag seems just about over, with a number of fat years ahead for the industry.

Closely allied with insurance stocks are bank stocks which have pretty much the same basic characteristics. They have an added attraction in that they make money whether interest rates are up or down. Higher interest rates mean more income while lower rates mean more business. Especially attractive are stocks of New York City banks which appear to be on the threshold of another major growth under the recently enacted law allowing their expansion into the fast-growing suburban areas of Nassau and Westchester Counties.

And, then, we have utilities as one of the traditionally defensive securities. As a group, growth prospects for the electric utility industry seem very favorable. According to a study in 1959 by Hemphill, Noyes & Co., the sale of electric energy appears to be in a long-term growth trend. Population growth, coupled with automation of industry, the home and the farm, are compounding the increase in use. Since 1929, the average use per residential customer has increased from 502 kilowatt hours to 3,366 in 1958. Besides, the industry is aggressively exploring new major markets such as the introduction in Connecticut of electrically heated homes on a mass basis. According to a Barron's story entitled, "Heating with Electricity," by Owen Fly, not one of the 100 split-level and ranch homes in a Bridgeport, Conn., housing project called Palmers Estates had a furnace. Instead of the traditional radiators or hot air vents, the houses were heated by electric glass panels installed in each room. Among advantages listed were cleanliness, even floor-to-ceiling heat, a healthful humidity level—and at a cost promised to be competitive with other fuels. "Climate control" in the home offers another vast potential market for electric energy because presently only 1 per cent or so of the 50 million homes in the United States have central heating and cooling systems. Even a modest rise in that percentage would mean substantial growth for the electric-utility industry. This growth would assume a stupendous proportion if the industry should succeed in extending "climate control" to industries on a major scale.

Like any other industry, electricity has its problems. Its chief competitor is just as aggressive in exploring market expansion. You must have heard video's charming Julia Mead unrelentingly pleading for "Heating with Gas." The gas industry has been doing very well since winning the crucial Supreme Court reversal of the Memphis ruling which had, in effect, destroyed the long-standing procedure under which a pipeline company could file for higher rates, then collect money according to these rates under bond, subject, of course, to refunds if the Federal Power Commission should so rule. The Memphis reversal was hailed as the end of one of the more serious threats ever faced by the industry.

Among the more attractive gas equities is Suburban Gas which was the first LP-gas distributor to enjoy a New York Stock Exchange listing. Sales have soared 500 per cent in the past decade, with profits compounding at an average annual rate of 40 per cent. That is the kind of growth generally associated with electronics instead of the more stable utility companies. Southern Natural Gas is another equity with a brilliant future. In addition to dynamic expansion in its own field, it possesses quite a few hidden values, including its ownership of 172,000 shares of a promising company named Air Reduction.

Telephone (the industry as a whole, not just American Telephone and Telegraph) is another utility which combines stability with growth. As for AT&T itself, it is, according to Walter Gutman, "the nearest thing that I know to a stock which will give someone a chance to make a good deal of money with very little risk." In his anatomy of America's most widely held stock (200,000,000 shares in the hands of 1,600,000 stockholders), Mr. Gutman found the composite picture of the big telephone family, based on its January 1960 income. This is shown in the chart.

The Largest Subsidiaries Of American Telephone & Telegraph
January 1960 Net Income
                                             1960                   1959
                                             (thousands)          (thousands)       % Increase
New York Tel.                      $10,531              $10,174           3.4
Pacific Tel. & Tel.                  12,544                10,042             24.9
Southern Bell Tel. & Tel.       9,213                  8,746               5.3
Southwestern Bell Tel.           10,678                9,829               8.6
Bell Tel. of Pa.                       4,875                  4,389               1.1
Illinois Bell Tel.                      6,562                  6,068               8.1
New England Tel. & Tel.       4,039                  3,698               9.2
Indiana Bell Tel.                     NA                     NA                  —
New Jersey Bell Tel.              NA                     NA                  —
Ohio Bell Tel.                        3,772                  3,459               9.0
Totals                                    $62,204              $56,405           10.3

What does this composite telephone reveal? In the words of Mr. Gutman, "there is nothing sure even for the Telephone Company. If all subsidiaries of the company were as sluggish as the New York Bell Tel.—the stock o£ American Tel. wouldn't be so great, and if they were as much like a rocket as Pacific Tel. and Tel., the phone company would be electronic."

Another revelation is that as a whole the company in 1960 was more than 10 per cent ahead of a year ago. If the company should forge ahead through 1963 at that growth rate, its annual earnings would be $7.00 per share by then, which, if capitalized even at a modest 20 times earnings, would sell for $140 or so a share. Mr. Gutman saw the possibility of AT&T capitalized at 30 or so times earnings, which would put the stock in the $200 price range. Maybe one of these days American investors will come to realize that 30 or so times earnings won't be too high for the stock of a company, which, according to a Capital Gains Research Bureau report (dated September 24, 1959), had earned more money than America's top 35 money-makers except IBM in the 10 years between 1948 and 1958! It's also the same company, you know, whose Bell Telephone Laboratories division was instrumental in bringing about most of the major technological breakthroughs in the electronics industry!

It was no more than five years ago that old Mother Bell was regarded as just what the doctor ordered for widows, orphans and unimaginative investors who had to think of dividends first. The stock was, of course, all right, but there just wasn't any growth for it.

Then the pendulum began to swing the other way. With its recent breaking of the 1928 high, AT&T appears to become a stock with a lot of growth characteristics. For one thing, the telephone industry seems in for a period of expansion. For another, it is not just a communication utility, but a manufacturing growth equity as well, especially in military electronics.

Many have come to like its comparatively low price-earnings ratio compared with other "stable income growth" companies. With demand fast increasing, it could be possible that there's not enough stock around of the world's most widely owned company.

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