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The Dawn of the Dow's Most Durable Company

By Alex Planes - Apr 15, 2013 at 11:33AM

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Learning from the market's past to understand its present.

On this day in economic and business history...

Thomas Edison's enduring legacy is that of a tireless inventor, but he also happened to be a strong businessman in his own right. However, without the brilliant backing of financier J. P. Morgan (JPM -0.70%), founder and head of the bank by the same name, he might never have gained such prominence. Prior to 1892, Edison's greatest achievement was the invention and commercialization of the incandescent bulb. His diverse electric enterprises had merged into one -- Edison General Electric -- but Edison remained far too attached to the inefficient direct-current method of power supply to succeed over the long run. On April 15, 1892, a Morgan-negotiated merger between Edison's company and the rival Thomson-Houston Electric Company was completed, forming General Electric (GE -0.56%).

GE began trading on the New York Stock Exchange several months later, with a single modest 50-share block trade executed at $108 per share. Although Edison was a major proponent of direct current -- to the point where he electrocuted an elephant with alternating current in an effort to prove that AC was dangerous -- he did not control enough of GE to stop its wholesale adoption of the newer and longer-ranging alternating current. When the Dow Jones Industrial Average (^DJI 0.08%) was created four years later, GE was made one of its 12 founding members in recognition of electricity's importance to the modern industrial economy. Although it was removed shortly after inception, GE returned to the Dow in 1907 and has enjoyed continuous membership ever since, earning the electric pioneer the only spot in the Dow's century club.

When GE rejoined the Dow in 1907, its market cap stood at roughly $65 million, and it had already been paying dividends for eight years. The company has paid dividends every single year since 1899 and has undergone nine stock splits that have turned one share into 4,608, not counting any reinvested dividends. That means the heirs of that first investor who bought that 50-share block in 1896 have seen his $5,400 investment grow into a stake worth at least $5.4 million -- and almost certainly more on account of a century of reinvestment.

Here's a quick look back at some of the notable events in GE history, with plenty of details available at the provided links, if you're interested in learning more:

  • 1895: GE builds 90-ton electric locomotives and 800-kilowatt transformers.
  • 1896: GE introduces its earliest medical products for producing X-ray images.
  • 1900: GE establishes its first research lab, located in Schenectady, N.Y.
  • 1909: GE's William Coolidge develops the modern tungsten filament for lighting.
  • 1917: GE introduces its first hermetically sealed electric refrigerators.
  • 1919: GE creates RCA, the largest radio company in the United States.
  • 1927: The first home television test receives signals from a GE station.
  • 1932: GE creates its credit subsidiary, now GE Capital.
  • 1938: GE invents the fluorescent lamp.
  • 1942: GE builds the first jet engine in the U.S.
  • 1945: GE demonstrates radar for commercial aviation.
  • 1955: GE develops the first useful artificial diamond.
  • 1957: GE reactors power up at the world's first commercial nuclear plant.
  • 1962: GE scientist Bob Hall invents the solid-state laser.
  • 1978: GE earns its 50,000th lifetime patent.

GE has continued to develop new products and technologies throughout its corporate life while remaining true to the spirit of its founding. Today the company is one of the top 25 public companies in the world by revenue, and its consistency and profitability have earned it one of the 10 largest market caps on American markets.

Moving the earth for market-beating returns
(CAT 1.40%) was formed from the combination of two large American tractor manufacturers on April 15, 1925. That day, C.L. Best Tractor Company and Holt Caterpillar came together to become the modern heavy-equipment market leader so familiar to Dow watchers. This brought more than a decade of contentious litigation between the two companies to an end, combining the financially and technologically stronger Best with the more popular and widely distributed Holt. Without the merger, both might have sued each other out of existence. Together, they had the power to dominate their industry. The Antique Caterpillar Machinery Owners Club highlights the new company's immediate success:

Shareholders in the consolidated company were rewarded. Between 1926 and 1929, sales more than doubled, and profits roughly tripled. At the same time, the efficiencies of the consolidated operations led to consumer price reductions in the Caterpillar Thirty and Sixty [tractor] models: from $3,665 to $2,475 for the Caterpillar Thirty, and from $6,060 to $4,300 for the Caterpillar Sixty.

Caterpillar survived the Great Depression by introducing new models, updating its look (the iconic yellow-and-black color scheme was adopted in 1931), and switching to diesel engines for its equipment in 1931, as the ACMOC recounts:

Shortly after the Best-Holt consolidation into the Caterpillar Tractor Co. in 1925, C.L. Best revisited the question of diesel engines. He hired Art Rosen in 1928, who had experience with the application of diesel engines to marine uses. Between 1926 and 1932, Caterpillar spent over $1 million in engineering research and development to produce Caterpillar's first diesel engine, the D9900, for the market.

Early quality problems involving the era's high-sulfur diesel fuels prompted Caterpillar to team with Standard Oil of California -- today's Chevron -- to develop detergent oils, which gave heavy-industry diesel engines the advantage over gasoline. That advantage, pushed by developments across the industry, persists to this day, and it allowed Caterpillar to scale up its machinery as fuel economy continued to improve.

Multiple Caterpillar tractors released during the Great Depression claimed the title of "largest and most powerful," each new iteration displacing its predecessor. Caterpillar was increasingly abandoning the farm market for heavy industry, which was more readily supported by government funds or by scarce bank financing. By the end of World War II, a modern Caterpillar had taken shape, with an increasingly diverse product line for construction, earth-moving, and other extractive industries.

From the year of its merger to the 80-year celebration of that merger, Caterpillar grew from a company with $21 million in annual sales to one that raked in $36 billion a year. That number has been far exceeded in more recent years, a testament to the company's strength and resilience through all manner of economic climates. Capitalized at $6.5 million after its merger, Caterpillar's value grew enormously over the years, reaching $30 billion on its 80th anniversary -- an annualized growth rate of 11.1%.


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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$32,223.42 (0.08%) $26.76
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$118.26 (-0.70%) $0.83
Caterpillar Inc. Stock Quote
Caterpillar Inc.
$207.19 (1.40%) $2.86
General Electric Company Stock Quote
General Electric Company
$74.63 (-0.56%) $0.42

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