FINANCE AND INVESTMENT
By CUSTOS EVIDENCE continues to accumulate both of the toughness of the problems confronting the new Chancellor of the Exchequer and of his determination to grapple with them. The latest quarterly figure of 940 million dollars as the gold and dollar deficit of the sterling area is even larger than had been feared. With no Marshall Aid to bridge the gap the resultant drain on the gold reserves is at an alarming rate. It is fortunate indeed that the reserves have been raised sub- stantially since the pre-devaluation crisis in September, 1949. The problem of stem- ming the gold loss remains, nevertheless, urgent and it need not be doubted that more cuts in" non-essential " imports, as well as many other drastic measures, must be expected. Once again Mr. Butler has declared his determination to make sterling strong and for the first time since the war I feel that we have a Chancellor/who will not shrink from his grim task.
Restraints Over Markets The implications for investors are obvi- ously not very encouraging, at least not in the short run. As the steps taken to bring the external situation into balance are brought into effect-reducing imports and increasing exports-the inflationary pres- sures internally will be increased. That is clearly a consequence which Mr. Butler must prevent by strict control of credit, clamping down on the capital investment programme and, I fear, reducing personal spending power. His task is difficult and complex and we may still hope that in tack- ling it he will not altogether forget that incentive, as well as austerity, must form part of the Government's programme. My advice to investors remains the same- to concentrate on the shares of companies in the rearmament and other essential industries-I would add oil, rubber and tin shares at current levels-and to seek out the " special situations," especially in the over- seas field. The outlook for gilt-edged remains as obscure as ever. On the one hand a further rise in short-term money rates is obviously possible. That would pull down the prices of short-dated bonds but would not necessarily depress more than temporarily the longer-dated issues. On the credit side one must put the gradual strengthening of investment confidence which will make its effect felt as the conviction grows that our troubles are being tackled on the right lines and are yielding to the Chancellor's treatment.
Bank Dividend Decisions As I forecast, none of the banks has seen fit to make any change in its dividend distri- bution for 1951. Published profits have shown some modest variation, in that two members of the "Big Five "-Lloyds and National Provincial - have disclosed a modest increase in net profits, while the other three, and also Martins and the District, have shown lower figures than in 1950. As I have often emphasised in these notes,. bank profit figures are influenced to a great extent by policy considerations, in that they are struck after making deductions of unspecified amounts for transfers to inner reserves. Last year, in view of the heavy depreciation on gilt-edged holdings, such transfers must have been on an unusually large scale. The banks' decision to replenish inner reserves is plainly apparent in the sub- stantial appropriations which have been made to contingencies reserves, as distinct from the more normal transfers to the pub- lished reserve funds. The new year pros- pect for bank profits and dividends is far from being unclouded. The rising tendency of costs, which ate into gross earnings last year, has not yet been arrested, and so far as gross earnings themselves are concerned, it seems at least possible that the expansion of advances will be slowed down under Mr. Butler's disinflationary policy. There is also, of course, the problem set by chang- ing gilt-edged prices. Who can tell whether at the end of 1952 the gilt-edged recovery may have set in or whether further pro- vision for depreciation will be required ? All in all, it looks as if bank shareholders may reasonably expect to see their dividends maintained, but not more than that.
Carreras Profits Fall There may be some slight disappointment, but there should be no real surprise, at the fall in profits for the year to October 31st last. now reported by Carreras, the tobacco manufacturers. The group figure, after providing for United Kingdom taxation of £1,579,446, against £1,536,116 in the preced- ing year, is down by £239,824 to £1,286,250. In his statement at the last annual meeting Sir Edward Baron gave stockholders a plain warning that the group would probably be unable to maintain its high level of earnings in face of dollar leaf purchases made at full devaluation cost and of rising prices for all kinds of materials. Last summer Carreras and other big tobacco manufacturers raised the selling price of the standard packet of 20 cigarettes by ld., but that increase came only two months before the close of the company's financial year. With its distri- bution covered by a fairly ample margin Carreras is able to maintain the 35 per cent. dividend on the Ordinary capital which has been in force since 1944-45. This decision has helped to steady the price of the " A" and " B" shares, both of which have shown little change following the profit and dividend statement. At 95s. the £1 " A" shares now offer a return of 7f per cent. and the 2s. 6d. " A " shares at 12s. 9d. can be bought to yield 7 per cent. The tobacco supply position must remain difficult so long as the dollar crisis remains acute, and there are some signs of a falling-off in con- sumption in the home market. It seems to Me, however, that these factors are well dis- counted in the relatively high return obtain- able on the shares, and I would not, there- fore, advise holders to sell.
Stanhope Steam Plan Speculators in shipping shares have had their appetite whetted by the announcement of a capital repayment plan by the Stanhope Steamship Company. Following the sale during recent months of seven ships, this tramp-owning concern has formulated an ingenious scheme, under which surplus liquid assets estimated at £2,320,000 will be paid back to the Ordinary stockholders. On the £400,000 of Ordinary capital, which is in the form of 5s. stock units, the estimated eventual cash distribution is about 29s. a unit. Flanking this repayment scheme is a proposal to transfer seven ships of the present fleet to a new company in exchange for 1,600,000 Ordinary £1 shares. The capital of this new company wilt then be distri- buted, in the proportion of one new £1 share for every existing Stanhope 5s. unit, to the present Stanhope stockholders who may therefore expect to receive 29s. in cash, plus a £1 Ordinary share, in the new com- pany. This seems a hopeful prospect and there can be little doubt that stockholders will readily agree to the company's plans. Following the announcement of the scheme the 5s. units have fallen back a shilling or two to 51s. 3d. as a result of profit-taking by speculators who have bought heavily in recent months. At the present level a buyer is, in effect, paying 22s. 3d.-allowing for the prospective 29s. cash repayment-for the £1 shares of the proposed new company. At this stage it is not easy to judge whether 22s. 3d. is an under- or an over-valuation of the new company's prospects. On the face of it, however, a capitalisation of £1,600,000 looks distinctly conservative for a fleet of seven ships, which includes some new tanker tonnage. For those who have patience and who are prepared to ignore fluctuations Stanhope 5s. units still look a reasonable speculation. As for the *amp shipping market as a whole, I think it is foolish to follow the recent rise, although doubtless there will be further deals in the coming months. For the long view-on earnings prospects and the strength of the assets- Silver Line 10s. Ordinaries around 25s. look reasonably cheap.
A Rearmament Share Reflecting the dullness of conditions in the industrial share market, even the equities of companies which stand to benefit from the rearmament programme have found lower levels. Among the fairly sharp adjustments to the new conditions has been a fall from 8s. at one time last year to 5s. 9d. in the 2s. Ordinaries of Armstrong Shock Absorbers. This movement has taken place despite the publication of distinctly satisfactory earnings figures for the year which ended on June 30th, 1951. Net profit, after tax, reached a new peak at £49,595, against £46,620, and the 20 per cent. dividend was maintained out of earnings of nearly 90 per cent. The com- pany put £35,000 to general reserve, as in the previous year, with the result that this reserve now stards at £164,000, or much more than the issued Ordinary capital of £100,000. There is also a replacement reserve of £40,000, so that the company has an unusually strong balance-sheet. In his annual statement made in October the chairman disclosed that substantial orders had been received for heavy-duty shock absorbers in connection with the defence programme. He also mentioned that the factory at York is now in full production of a range of telescopic shock absorbers and of a new type of front suspension unit for a leading firm of motor manufacturers. It would appear, therefore, that the trading prospect for this company is bright. At 5s. 9d. the 2s. shares are offering the attrac- tive yield of 7 percent. on a dividend covered 4,1 times by last year's earnings. It seems to me that there is scope here for some recovery.
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