FINANCE AND INVESTMENT
By
CUSTOS DESPITE the change of attitude of the Russian and Chinese Governments, any drastic cut in defence spending is unlikely except where released factories and workers can quickly be switched to the manufacture of other products. Further, any reduction in defence spending would almost certainly be matched by equivalent tax reliefs —in America at all events. Nevertheless, there is always some lag in the adaptation of factories, plant and labour to new products ; and it is one thing to put more spending power in the hands of the public and quite another to make sure that they will spend it. When the-econo- mic outlook is uncertain, people are more likely to save and thus throw others out of work. There is no large backlog of unsatisfied domestic wants in America ; and since a high proportion of incomes is spent on such goods as cars, houses, furniture, refrigerators and T.V. sets, for which demand can easily be postponed, the saving capacity of Americans is exceptionally high. By virtue of its high productivity and high standard of living, America is, in fact, the only country in the world which can " afford " a severe slump.
De Havilland Surprise In the light of the company's known expansion programme and its success with the Comet air liners the latest results' of De Havilland Aircraft covering the year to September 30th, 1952, have come as an unpleasant surprise. So far from showing a substantial expansion, as had been confi- dently predicted, group surplus has fallen from £1,773,594 to £1,698,886. Even allow- ing for the lower charge for U.K. taxation, net profit is down from £639,290 to £597,108. The company merely maintains its Ordinary dividend rate at 7I,per cent., whereas hopes had run high that 10 per cent. might be forthcoming. The £1 Ordinary units have fallen back from 33s.—they touched 35s. 6d. a few weeks ago—to 29s. At this level, yielding just over 5 per cent. on a well- covered dividend, I think De Havilland equity is worth putting away as a long-term industrial investment. It seems a safe assumption that in his forthcoming annual statement the chairman will make it clear that from the profit-earning standpoint much of the fruits of the company's expansion programme has not yet been gatheied in. As regards dividend policy, the board has doubtless been influenced by the increasing financial requirements of expanding business.
British Electric Traction Hopes The 1952 results of Birmingham and District Investment Trust are a hopeful pointer to the experience of British Electric Traction for the year to March 31st, 1953. The Trust—which shares the control of Birmingham and Midland Motor Omnibus with the Transport Commission, and is in turn controlled by B.E.T.—recently reported improved earnings and raised its dividend for the year from 15 to 20 per cent. British Electric Traction paid a dividend of 25 per cent. for 1951-52 out of earnings of nearly 80 per cent., and last October put up the interim dividend from 71 to 10 per cent., without ally warning that the increase did not indicate a larger total distribution. Over the past three years average earnings on B.E.T. Deferred stock have exceeded 80 per cent., and a substantial increase in the distribution is possible. The fact that Mr. H. C. Drayton, the chairman of both B.E.T. and Birmingham and District Trust, raised the Trust's dividend, shows that he is not averse to paying more. In addition to its vast network of bus interests, B.E.T. also has a large general investment portfolio, and substantial interests in laundries and radio relay services. At the current price of 465 British Electric Traction " A " Deferred Stock yields 52 per cent. on a 25 per cent. dividend basis, and would yield nearly 6k per cent. if the payment were raised to 30 per cent., which would still be covered over 21 times by recent earnings. A point worth noting is that the executive directors and whole-time offices of B.E.T. hold options up to the end of 1955 to subscribe for 118,000 " A " Deferred shares of £1 at £5 each, which is equal to £500 per £100 of stock. In a reasonably favourable market environment the price could easily rise above £500. The break-up value is much higher.
Gossard Prospects Since the denial of the take-over rumours, which put the price up sharply to 17s., the 5s. Ordinary shares of Gossard, the makers of foundation garments, have come back to 15s. 3d. At this price they yield 5.9 per cent. on the 18 per cent. dividend for 1951, which was generously covered by earnings of 79.4 per cent. The 1952 profits will, no doubt, reflect the sharp drop in textile sales in the first half of the year, but the interim dividend has been maintained at 6 per cent., and there seems reason to hope that the total payment will not be less than the 18 per cent. paid for each of the past six years. Recent reports suggest that sales have improved recently and that further expansion is contemplated, particularly in the export field. Notwithstanding take-over denials, there is a strong impression that developments are in prospect which would justify a higher price for the shares. The company is believed to have a substantial interest in William McIlroy, the Reading and Bath drapers, whose 5s. shires are now around 29s. This holding alone, it is said, is worth nearly 9s. for each Gossard share, and the value might be very much more if William 'Mcllroy were to sell their stores and other properties. The fact that William McIlroy shares now yield wider 2 per cent. gives some colour to suggestions that the disposal of the properties is under con- sideration. Apart from these possibilities, however, Gossard 5s. shares do not look too dear at 15s. 3d. in the light of the record and prospects. I think that holders should retain, and I should not oppose a semi- speculative purchase around the present price.
A High Yielding Textile Among the group of low-priced shares offering high yields are the ls. shares of Herbert Whitworth, now around 5s. 10/d. Since 1947, when the undertaking became a public company, earnings have ranged between 317 per cent. and 119 per cent., and a dividend of 60 per cent. has been paid each year. The business is that of merchant converters and exporters of cotton, rayon and woollen yarns and piece goods. In his annual survey last May—when the textile trades were at a low ebb—the chairman referred to keener competition and narrower profit margins, but expressed the view that a good export trade in textiles could be maintained if ways and means were found to quote prices com- parable with those of foreign competitors. In this policy the company seems to have met with success, since the interim dividend was maintained at 30 per cent. last October, and a scrip bonus of £2 in 51 per cent. Preference shares for every £5 nominal of Ordinary capital has just been distributed. If, as seems probable, the dividend for the year to March 31st, 1953, is unchanged at 60 per cent., the yield on the Ordinary at 5s. 10Id. would exceed 10 per cent. On the basis of balance-sheet values at March 31st, 1952, the net asset value of these shares is about 7s. 41d.
Constable, Hart Attractions While it may be premature to anticipate a slowing-down of rearmament and conse- quent adjustments in Britain's economy, it is not too soon to have a look at shares which are already good value for money and which should benefit if real peace comes. Among these I would include the £1 Ordinaries of Constable, Hart & Co., the public works contractors, now quoted around I 5s. 6d. For the year to Sep- tember 30th, 1952, this company achieved an increase in its trading profit from £68,203 to £128,390 and raised its Ordinary dividend from S per cent. to 71 per cent. At the present price the shares are, therefore, yielding close on 91 per cent. In his annual statement the chairman reports that the company has started the current financial year with a satisfactory volume of work in hand. It should doubtless benefit if and when the Government is able to start on long overdue schemes of road improvement. Constable, Hart would also benefit sub- stantially from the repeal of or reduction in the Excess Profits Levy. Last year the E.P.L. charge for nine months amounted to £10,000 out of a total tax charge of £53,524. Between 1940 and 1948 the company paid a steady 8 per cent. dividend, and the shares were frequently quoted several shillings over par.
The Need for Caution Until the outlook becomes clearer, in- vestors should proceed with the utmost caution. Some liquidity is desirable, and new investments should he largely restricted to short and medium fixed-interest stocks, depressed foreign bonds and gold shares. For the present, I am doubtful about many industrial and commodity shares ; but if the fall in commodities is prolonged, the sterling area's gold reserves may be severely strained, and it might then be time to buy commodity and export industry shares. I should add that I am not predicting a slump either in America or here : " What's to come is still unsure." I am simply indicating what might happen in certain conditions and how investment policy should be adapted if the economic climate should change. Uncer- tainty itself is a notorious astringent of enterprise ; and a protracted phase of un- certainty could cause setbacks in commodities and stock markets, even if expenditure on defence were maintained.
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