The book Merchant Princes is about the people who ran a Canadian company called Hudson’s Bay Company (HBC) which started from a land grant from the King of England to his cousin Rupert in which he gave all the lands which rivers flow into Hudson Bay. This land grant turned out to be most of northern and western Canada. Shortly after the grant, the fashion of the day was top hats made out of beaver pelts. The HBC was in the fur business and beavers were easily found and their pelts were shipped to England and the company was making money. For over 100 years, the business plan worked until 1867 when the country of Canada was formed and people in the west growing grain and doing what people do – populating the great plains. As time changed one man was in great position to benefit. Donald Smith had worked his way up from a clerk in the eastern territory of Newfoundland to become the President of the company. Along the way because he could rub two nickels together to produce more, he was managing 37 trusts of stocks holdings for the partners of the HBC in Canada. Primarily he was buying company shares as well as bank shares. The bank elevated him to a Director and shortly the President of the company. In the book, Merchant Princes by Peter C Newman, published by Viking Books, Toronto, 1991, Mr. Newman says Mr. Smith deceived his trust holders. Mr. Smith could see the nature of the HBC was changing from fur monopoly to a giant land holder in a new country. By holding on for 10 years, the land would be more valuable, however Mr. Smith would buy the trust holders shares for the equivalent of $9 a share and these shares in Donald’s lifetime went to over $130 each or a 1300 %. In addition due to land sales, the dividend payment was increased each year. As the company was the banker with the one he was President of – a healthy line of credit was extended to Donald. It is noted for much  of his adult life Donald was the HBC largest shareholder.

For a long time, the HBC ran a steam whistle boat from St. Paul to Winnipeg with rates that were expensive. Mr. Smith began to eye the railroads when on a trip he saw how good the land was for growing grains. There was a railroad but it was either before its time or poorly managed called the St. Paul and Pacific. In partnership with James Hill, Mr. Smith bought the railway for $238,000 in cash for the bondholders who had not been paid were eager to sell their securities. The railway was worth easily in the $20 million range and within 10 years was worth over $60 million and paid interest and dividends well into the future. The success of the St. Paul, Minneapolis and Manitoba Railway lead to the CPR.

The CPR was started with $30 million grant and  lands for the railway and Don Smith and Associates submitted the winning bid. During the construction, if it not been for the Louis Riel story, the railway may have gone bankrupt for the construction in the mountains and muskeg was expensive and few people live there. Eventually minerals were found and the CPR grew to be a mutual fund on the Canadian economy. After the Louis Riel story, the Canadian public was delighted to back mortgage bonds on the CPR as they saw the importance of a railway in the new country and the CPR people were happy to indulge.

Linking to dividend paying stocks, when companies have monopolies and their dividends come in like clockwork, there does not have to much vision besides to stay the course. When times change, new visions are needed. The big question with Donald Smith is why did the CPR benefit (his investment) when the HBC (his employer) missed the great opportunities the CPR took advantage of. Mr. Smith might have done good for both companies except one did not. When you look at the Boards and see it is wonderful people have connections, but you have to wonder if are they using them for the shareholders benefit?

There are more questions than answers, till the next time – to raising questions.