FINANCE AND INVESTMENT
By CUSTOS
TAKING their cue from Wall Street, which appears to be surprisingl e1 tkutiastic about equity share prospects in the rearmament phase, st klnarkets here are still moving up. Until the announcement of 1 cut in steel supplies to the motor industry investors seemed 1
ptipmed to turn a blind eye on raw material shortages, transition diffidffities and the coming budget, to say nothing of the dis- couraging war news from Korea. The sudden and powerful reminder of the adjustment problems now facing many sections of British industry has had an appropriately sobering effect, but I doubt whether markets are about to fall back. The fact remains that most investors are showing a distinct preference for shares to cash and that plenty of money, chiefly from the institutions such as insurance companies, is available for sound investments at the right mice. On discriminating lines prices may well continue to move slowly ahead, with the emphasis on equities in essential industries and commodity shares.
Steel Share Problems Among the influences which have helped to sustain markets and especially industrial Ordinary shares in recent weeks has been the steady reinvestment demand from former holders of iron and steel shares. There is now a heavy two-way traffic in iron and steel shares on the Stock Exchange. On the one hand are those private investors who, faced with the threat of a compulsory exchange into British Iron and Steel stock when the industry is vested on February 15, have made up their minds to sell and reinvest in other directions. On the other are City institutions, mainly the insurance companies, who are willing to absorb these offerings of iron and steel shares, so as to become possessed of Iron and Steel stock on February 15. At present prices, which show an average discount of approximately 4 per cent, on take-over prices, these institutions find purchases of Iron and steel shares a convenient backdoor into the gilt-edged market. They are also acting on the view that if at some subsequent date a Conservative Government implements its promise to unscramble the national- isation plan they would not suffer any adverse financial con- sequences. It is assumed that in any unscrambling arrangements British Iron and Steel stock would be repaid at par or would be replaced by some similar gilt-edged security.
Unscrambling Prospects Those are the two main streams in the current turnover in iron and steel shares. There are, in addition, some buyers who are acquiring a stake in carefully selected steel shares for the attractions they hold in the event of unscrambling taking place. These buyers wish to get their names on the companies' share registers when the threatened take-over takes place, so that if and when the industry is handed back to private ownership they will be given the oppor- tunity of re-acquiring the shares they have purchased. The operation is essentially a short-term one, since the buyers intend to sell the Iron and Steel stock for which the shares will have to be exchanged on February 15. The favourite media for this purpose are such equities as South Durham Ordinaries, Dorman Long Ordinaries and Stewarts and Lloyds Deferred. In each of these cases the current rate of dividend Is covered by a large margin of earnings and there is a strong assets position. The buyers, therefore, argue that but for nationalisation shares such as these would command much higher prices and as a corollary that if un- scrambling takes place an option to re-acquire the shares should be a valuable one well worth exercising. Now that the medium and longer-term outlook for the iron and steel industry has been so greatly improved by rearmament I would not quarrel with this view. Provided ;ron and Steel stock is saleable In the market at or close to its par value the operation will not involve any loss, since a buyer of most steel shares at today's levels, allowing for stamp duty and brokers' commissions, is, in effect, buying Steel stock under par.
Bank Dividend Policy The annual profit and dividend season of thy banks has etre and gone, leaving the field opeo for the bank chairmen to review the balance-sheets and give us their ideas on the nation's economic and financial problems. Nobody expected any changes in bank dividends and none has, in fact, been made. The only surprise in the profit and dividend statements has come from the Midland Bank, which, with characteristic individuality, has differentiated itself from its fellows by announcing a small reduction in its net profit. Last year's net figure of the Midland was £1,987,320, against I:2,006.414 in 1949, and £2,025,728 in 1948. It should not be inferred that the Midland alone among the banks suffered a reduc- tion in earnings last year. As I have often emphasised, the banks' published net profit figures are influenced by policy considerations, since they are all struck after making provision of unspecified sums for various inner reserves and for bad and doubtful debts. All that has happened is that the Midland Bank directors have seen fit to lay emphasis on the rising tendency of costs—and possibly to forestall any shareholders' plea for an increase in dividend—by announcing slightly reduced profits. In almost every case the dividend rate now being paid by the banks has been in force for a period of something between 10 and 20 years. At a time when so many industrial companies, including several of the largest and most cautiously run concerns, are announcing modest increases in dividends, some bank shareholders will naturally feel that they are being left out in the cold. Increased dividends would certainly be justified by reference to bank earnings. Unfortunately, bank directorates appear to set themselves standards of financial conduct, which, while doubtless contributing to the nation's financial morale, bear hardly on the shareholders whose net income from dividends is being steadily whittled down 13) taxation, in face of a rising cost of living.
Gallaher Financing Plan Like the Imperial Tobacco Company, Gallaher, another of the larger units in the tobacco trade, is carrying through a funding operation. It is raising approximately £2,750.000, partly through an issue of 160,000 £1 Ordinary shares at £5 each and partly by means of a £2,000,000 4 per cent. Unsecured Loan Stock. The new Ordinary shares are naturally being offered as "rights," in the proportion of one new for every fourteen held, to the existing Ordinary shareholders. The new loan stock, which is being under- written by Edward de Stein and Company, the City investment bankers, is being made available to the company's Note, Preference and Ordinary shareholders. Whether or not it is intended to retain the new Unsecured Loan Stock as an investment, those to whom the opportunity is offered should take advantage of it, since in present market conditions the stock should command a useful premium. The 4 per cent. Unsecured Loan Stock of Imperial Tobacco Company, whose redemption dates are 1960-70, now stands in the market around £103. Gallaher's new stock, dated 1960-65. is being offered at a price of £99. Even allowing for the slight difference in cover in favour of the " Imps " loan stock, the new Gallaher security is obviously being offered on attractive terms.
A Shipbuilding Share
I outlined last week the reasons, springing from increased shipping activity and the rearmament programme, why the ship- building industry should be kept busy for an indefinite period ahead Most shipbuilding shares have already risen substantially in antici- pation of higher profits and dividends, but the group still seems to offer opportunities. Among the shares which appear to me to be under-valued are the 5s. Ordinaries of J. Samuel White, whose shipbuilding and engineering works are at Cowes, Isle of Wight. This company specialises in building small vessels ard has under- taken contracts for the British and various foreign navies. For the year to September 30th, 1949, when the volume of work offered was insufficient to keep the yards occupied to capacity, the Ordinary dividend was reduced from 15 per cent. to 12.1 per cent. During the early part of the year which ended on September 30th, 1950, conditions were none too easy, but it seems a reasonable assumption that the company should now be fully employed. Taking the 12+ per mt. dividend as basis the 5s. shares quoted arood 9s. are odfering the useful yield of 6f per cent. I see no reaiffit why, In cilia due course, the dividend should not be restored to th• o d 15 per cent. rate. On assets the shares are also strongly pia , in that sultits liquid assets in the last balance-sheet were equ lent to roughly s. on the 5s. Ordinary shares. Adding in the fixed assets the Ordinaries have an asset value of 12s. 6E These shares are now standing well below their recent high points—ifs. 9d. in 1948 and 14s. 3d. in 1947. They should have scope for recovery.
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