Choo, Choo!
State of the Subways
A Dividend-Producing Income Stock
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Note from Cabot Wealth Advisory Editor Elyse Andrews: Chloe Lutts, editor of Dick Davis Digest and Dick Davis Income Digest is back writing for Cabot Wealth Advisory again, this time about the New York City subway system and a dividend-producing company that builds train cars. Enjoy!
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Today, I’d like to discuss the New York City subway, one of the most impressively complex in the world. Of course, I live in New York, so I’m hardly impartial.
The New York City subway has its origins in a patchwork of elevated railway tracks built by private companies in the late 1800s. The first elevated railway in Manhattan, over Ninth Avenue, was completed in 1868.
In 1903, the Interborough Rapid Transit Company purchased the railway, along with several other elevated railways. The IRT had been formed only a year before in anticipation of operating the underground rapid transit system the city had begun building in 1900; buying the elevated railways gave the company a monopoly on rapid transit in Manhattan.
In 1904, the city’s underground subway tunnel opened, running between City Hall and 145th Street at Broadway, and was leased to IRT.
Meanwhile, in Brooklyn and Queens, the Brooklyn Rapid Transit Company was operating seven more elevated railways. In 1908, BRT opened its first underground subway tunnel, a short segment of the Nassau Line, which extended from the Manhattan terminus of the Williamsburg Bridge down to the Manhattan terminus of the Brooklyn Bridge.
In 1913, the City of New York signed agreements with the BRT and IRT that became known as the Dual Contracts. The Dual Contracts laid out a plan for expanding rapid transit in New York, both subways and elevated railways. Under the contracts, the City would build new subway and elevated tracks and rehabilitate and expand some of the old elevated lines, then lease them to the two private companies for operation. The large majority of the city’s existing subway tunnels were built under the Dual Contracts.
However, a few stipulations in the Contracts led to the eventual downfall of both private company partners. Fares were limited to five cents, which caused financial troubles for both companies in the inflationary period after the end of the first World War.
Furthermore, the companies were required to share their profits with the city. After the deadly Malbone Street wreck imposed large liabilities on BRT in 1918, the company was forced to file for bankruptcy in 1919. It reorganized, and reemerged as the Brooklyn-Manhattan Transit Corp. (BMT) in 1923.
The Dual Contracts also gave the city the right to recapture any of the lines it built, and run them as its own. By 1920, that option was gaining political currency, with the support of Mayor John F. Hylan and fueled by anger at overcrowded subways and allegations that the private companies were profiting at taxpayer expense. After several years of debate over competing proposals for a city-owned-and-operated subway system, the newly-formed Board of Transportation put forward a realistic plan in 1924 that included two Manhattan main lines along Eighth and Sixth Avenues and a third line running under 53rd Street and connecting both to Queens.
The municipal-owned-and-operated system was originally known as the Independent City-Owned Subway System and later simply as the Independent Subway System (IND). In 1932, IND opened its first line under Eighth Avenue, stretching from 207th Street to Hudson Terminal (the future site of the World Trade Center). The system had 300 cars running the first day. The Eighth Avenue Line was expanded both Southward and into the Bronx in 1933. That same year, IND opened the crosstown Queens Boulevard Line, which connected the Eight Avenue Line to Queens via 53rd Street and continued under Queens Boulevard.
In 1937, the first (and still only) subway line that doesn’t go to Manhattan was opened as the Brooklyn-Queens Crosstown Line.
In 1936, IND began constructing its second Manhattan trunk line, the Sixth Avenue Line. The elevated railway already running along Sixth Avenue was bought by the city for $12.5 million and torn down. The subway opened in December 1940.
By 1940, the IRT was bankrupt and the BMT was struggling again. The private companies agreed to unification with the city-owned system, and both turned their operations over to the city.
In short order, most of the Manhattan elevated railways were torn down (with the exception of the Third Avenue El, pending movement forward on the proposed Second Avenue Subway. The El was eventually torn down in 1955 and the Second Avenue Subway is still not a reality).
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The unified IRT, BMT and IND operations were merged as the New York City Transit System. Most of the original subway tunnels are still in use today. The BMT and IND systems are now known as the B Division, and the IRT system, which uses smaller trains, as the A Division.
A Division lines are numbered, and include the 1, 2, 3, 4, 5, 6 and 7 lines. B Division lines are lettered and include lines A through G and the J, L, M, N, Q, R, V, W, and Z lines. At 9.75 feet across and 60 or 75 feet long, B Division cars are wider, longer, and heavier than those of the A Division, which are 8.8 feet wide and 51 feet long. As of March 2010, the system boasts 6,436 cars.
The largest and busiest subway/elevated system in the U.S., today’s New York City subway system has 468 stations and 842 miles of track. In 2008, New Yorkers and visitors took over 1.623 billion subway rides, averaging over five million rides a day on weekdays. Trains run 24 hours a day, 365 days a year.
However, the system, though impressive, is by no means perfect. New metrics introduced in 2009 found that for the year, just over 75% of trains arrived in their stations on time--and the Metropolitan Transportation Authority considers anything less than five minutes late “on time.” Just over 60% of trains on the #2 line were on time for the year. The most punctual lines--including the J, M, Z and the S shuttles--were on time over 90% of the time.
The MTA recently began surveying subway riders via annual rider report cards distributed in stations. With a response rate of about 17%, the subways received an average system-wide grade of C-.
More detail into riders’ gripes is available from the Straphangers Campaign, which publishes a yearly “State of the Subways” report for each individual line. Last year, Straphangers declared the 7 line the city’s best, based on more frequently scheduled trains, above-average regularity and below-average frequency of break downs, as well as cleanliness, clarity of announcements and availability of seats. The 7 runs across Manhattan under 42nd Street from Times Square then crosses under the East River, terminating at Flushing in Queens.
The award for second-best line went to the L, which is also a crosstown line in Manhattan, running under 14th Street from 8th Avenue before diving beneath the East River into Williamsburg, Brooklyn and eventually terminating in Canarsie.
Interestingly, the L and the 7 were the two pilot lines in a “General Line Manager Program” begun in December 2007 that put the responsibility for the line in the hands of a single on-site individual in an attempt to improve accountability. The program was hailed as a success by the MTA and expanded to all numbered lines in November 2008 and the rest of the system in August 2009. Anyone with experience trying to create accountability amid government bureaucracy can surely appreciate why this program seems so promising.
I, for one, hope it makes all the New York subway lines as efficient and pleasant to ride as the L, my current line.
The L is also distinguished for being the most technologically advanced line. The L line is currently the only line using Computer Based Train Control, a signaling system that oversees all train operations. Because it maintains a safe distance between trains at all times, it allows more trains to run in a given distance on the L line than on other lines.
The computerized system also made it possible for the Metropolitan Transit Auhtority to install LED screens in all the L stations to inform passengers how soon the next train will be leaving. More recently, at the request of the Line General Manager, one station on the L line got new displays that show the current location of all the trains on the line.
I may have reason to be hopeful; six months ago, the MTA got a promising new chairman in Jay Walder, who has already taken on London’s transit system and apparently improved it immensely. Walder is a proponent of high-tech solutions like smarter fare cards and GPS in busses.
His influence can already be seen in a few scattered subway stations and bus terminals, where experimental countdown clocks let passengers know how much longer they have to wait. At 6 line stations in the South Bronx, existing electrical signals that indicate the presence of a train on the rails are sent to the Rail Control Center in Midtown, which then sends estimated arrival information to passengers on the platform.
A less expensive solution in use at several A and C train stations uptown lets passengers know when an approaching train crosses what basically amounts to a tripwire a few hundred feet ahead of the platform.
Current plans call for expanding the system in use on the 6 line to the rest of the numbered lines (except for the #7) within a year, and to the rest of the system by 2014. At $213 million for the signaling system and another $171 for the signs and public address system, I’m skeptical of the timeline, especially given the MTA’s $800 million budget shortfall this year. However I’m hopeful that in the long run, with a little technology and a lot of intelligence, the new MTA chairman can make our already impressive subway system more efficient.
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Now on to today’s investment idea. Obviously, the public sector is a difficult place to invest. However, my subway rides do bring me face-to-face with one name I’m familiar with from the newsletter I edit, Dick Davis Income Digest, and that’s Bombardier.
Bombardier Transportation, a division of Bombardier Inc., is one of the world’s largest manufacturers of rail equipment, most notably train cars. The company’s name is on over 1,800 of the cars in use on in New York City’s subways.
Bombardier’s other major business is manufacturing aircraft, especially business aircraft.
The company has a number of preferred shares and debt issues that can provide a steady dividend stream for the income investor. Just under a year ago, Bombardier’s Class B Shares (BBD-B.TO) were recommended in the Income Digest at 3.71. They were yielding 2.07% at the time. The shares, which have since risen close to 6.00, were just recommended in the Digest again last month, by another contributor, for income and growth potential.
One final note: A Canadian company, Bombardier designed and made the torch used in the relay leading up to the recent Vancouver Olympics. The torch was able to burn in colder temperatures than any torch in Olympic history.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Dick Davis Digest
For Cabot Wealth Advisory
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