THE STABILITY OF UTILITY EARNINGS per share may be epitomized by the advice that the utility analyst frequently receives from the industrial analyst: you want to get next year's earnings, just copy down the figure for last year. This, of course, is almost never true, but in one of the most outstanding utilities, American Telephone & Telegraph, earnings have tended to fluctuate rather closely around $9 per share for over twenty years. Thus, the $9 dividend has been maintained, but with little prospect of an increase, in effect, making American Telephone a fixed-income security. What are the factors that keep other utility common stocks from being fixed-income securities to the same degree as American Telephone? Growth, though often mentioned, does not seem to be a factor, since American Telephone has increased its revenues from $975 million to $4,040 million in the last twenty-five years. This compares with the growth in output of the basic steel industry of from 78 million tons in 1937 to 109 million tons in 1952, or of the national income from $180 billion in 1946 to $292 billion in 1952. Technical improvements are likewise common to both the telephone and other branches of the utility industry. As we check through, item by item, we find that one big difference is in the attitude of utility managements toward the limited rate of return their companies are permitted to earn. The American Telephone management has chosen policies that have resulted in stabilizing earnings rather than in increasing them. Other managements have, to a greater or lesser degree, adopted policies that have made their utilities growth favorites. Assuming that regulatory practice for the period under discussion remains unchanged, what are the factors that might permit variation in earnings per common share? They are: (1) changes in capitalization ratios, (2) changes in money rates on the fixed-income portion of the capitalization, and (3) changes in book value of the common stock. Regulation, of course, does not actually determine what the earnings shall be, but merely determines whether they are adequate, inadequate, or more than adequate. Therefore, economic factors may at any time result in earnings per common share being either materially less or materially greater than the amount permitted by the regulatory bodies. Since, in case the Commission determines that earnings are more than adequate, rate cuts will be ordered, and, in the event that the company seems to be earning materially less than an adequate return, the management will usually request permission to increase rates, let us consider the variations in per share earnings that may result, assuming a 6% return on invested capital. In the decade or more ending in 1952, interest charges on the debt portion of a utility capitalization frequently bore a 3% interest rate, and the preferred stock portion a 4 to 5 % dividend rate. It has been quite apparent that the common stockholder profited through being permitted a 6 % return on money that in part was costing him but 3%. It is obvious that the greater the portion of capital in the form of debt the higher the return on the common stock investment (see Example 1 ) . Assuming 30,000 shares of common stock outstanding, earnings per common share equal $1.20 per share. If in this example debt is increased to 60% and the common equity accordingly diminished to 20%, it will be seen that, although the amount available for common drops to $33,000, this, divided by only two thirds as many shares of common stock now to be outstanding, would be equivalent to $1.65 per share. This gain from increasing leverage can be continued until the entire capitalization is debt and half of the operating income becomes available to the common stockholder for only a nominal investment. It is obvious that the risk of the common stockholder increases as the debt requirements increase, and, as became apparent in the early '30's, with declining earnings on a highly leveraged company, this quondam highly profitable setup may result in bank-