FINANCE AND INVESTMENT
By CUSTOS As the election approaches markets register the continuing confidence of investors in a Conservative victory. Although the mood of exuberance- is over, it has been replaced by a cautious hopefulness, which finds expression in a widespread reluctance to sell and an _ equally widespread preference for holding securities rather than cash. What is remarkable in the current behaviour of prices is the breadth of the advance.' It covers not only industrial ordinary shares but gilt- edged and_ other fixed-interest stocks ; not only domestic securities but overseas invest- ments ; not, only commodity shares but gold shares. On the face of it this may seem like carrying confidence too far, and it would not be easy to reconcile all these upward movements in share values. Part of the explanation must be sought in the fact that although investors are banking on a Con- servative Government, they are 'also con- vinced that, at least in the short run, infla- tion must still be reckoned with and pro- bably as an even stronger force than now. In other words, while it is hoped and expected that in the medium term a Conser- vative regime would bring sounder money —and even more difficult conditions for profit-making in industry—few people are looking for any quick or violent changes. The gilt-edged market, which has maintained a surprising degree of firmness, is torn between conflicting forces. Pointing to a rise are the strengthening of investment con- fidence and in the position of sterling which a change of Government should bring. Restraining buyers are_the obvious dangers of the dollar crisis and the risk that, at some later stage, interest rates may have to be raised as part of a disinflationary pro- gramme.
Eastwoods' Expansion It is now becoming the fashion—and quite appropriately—for boards of directors to adhere to the Gaitskell dividend freeze and at the same time to intimate their inten- tion to pay something more if the election goes the right way. Mr. George Miller and his co-directors of Eastwoods, •the brick and cement makers and builders' merchants, are following this logical course. In this instance, adherence to the freeze involves a reduction in the Ordinary dividend from 12 per cent, to 10 per cent., this company hav- ing raised its payment during the two base years from 8 per cent. to 12 per cent. At the same time, stockholders are informed that, but for the Government's _proposals; the directors would ,have recommended a final dividend of 10 per cent., which would raise the total distribution for the year to March 31st to 15 per cent. Accordingly, they have transferred £35,000 to dividend reserve, this being the sum required to pay a further 5 per cent, on the Ordinary stock. The actual payment will be made if, when the annual meeting is held on November 15th, a Conservative Governmnt is in power and the dividend freeze ended. Mean- time, the results for the year to March 31st amply justify the board's policy. Reflecting a new record of sales which, in turn, has resulted from further expansion in practi- cally every section of the business, group 'trading profits have risen from £371,011 to £433,241. Depreciation has been charged at £106,948, against £98,851, and taxation has absorbed £170,285, against £142,917, Net profit is up, however, from £85,638 to £112,650, and £21,454, against nil, is allo- cated to general reserve. These figures are a clear indication of the achievements of the progressive management which the East- woods group enjoy, and in present conditions it is difficult to see why a company of this kind should not continue to expand. The £1 Ordinary units have moved up by 3s. to 45s., at which the yield on the 10 per cent. rate under the dividend freeze is 4f per cent. If, as seems likely, the extra 5 per cent. is forthcoming, raising the Ordinary rate to 15 per cent., the return is brought up to nearly per cent. The units are clearly an elec- tion equity, which should show a further improvement assuming the dividend freeze becomes inoperative.
Thos. Ward Outlook Another company which has given its shareholders an indication of better things to come when the dividend freeze is ended is Thomas Ward, the engineers. For the year to June 30th profits after depreciation but before tax and certain specific reserve allocations have risen sharply from £1,538,000 to a new record of £2,371,000. Whereas the dividend is being maintained at 15 per cent. another 5.per cent. is being held in reserve for payment at an appropriate date. From the preliminary figures it can be calculated that earnings on the Ordinary capital are well over 100 per cent. As con- structional, mechanical and electrical enginters, with many allied interests such as ship breaking and quarrying, the Thomas Ward group must stand to benefit substan- tially from the rearmament programme. By the same token it must be judged vulnerable to the threatened E.P.T. Since the announce- ment of the preliminary figures the £1 Ordinary shares have moyed up from 72s. to 76s., at which they are yielding approxi- mately 4 per cent. on the 15 per cent. divi- dend. If the rate is stepped up to 20 per cent., which would still be well covered, the return would be brought up to about 51 per cent. It seems to me that even allowing for the promising prospects the scope for further capital appreciation is fairly limited.
Property Deal Terms My forecast on August 24th that a bid of 30s. for the Convertible Preference and Ordinary shares of Associated London Pro- perties might be a reasonable compromise figure has proved close to the mark. For the Convertible Preferences Mr. Harold Samuel, on behalf of his Land Securities group, has made a cash bid of 30s. and for -the Ordinary shares he is bidding 29s. 6d., subject to his own, right to claim the final dividend, which amounts to approximately 6d. a share. The question now arises whether holders of the shares, who are pre- sented with a tempting profit in relation to recent market quotations,, should accept their board's advice and sign on the dotted line. My own feeling is that they would be wise to do so. Although, as their own directors have emphasised, the asset value behind their shares based on current prices in the property market can be estimated at something over 50s., one wonders whether this figure makes any allowance for any claims for tax on capital profits which might be lodged by the Inland Revenue Authori- ties. This seems to me to be an important point, about which nothing has yet been said. If tax were to be levied on any surplus realised over book values from properties sold, then obviously it would bring down the break-up value of these shares by a very substantial amount. In relation to revenue, as I pointed out on _August 24th, the bid of 30s. looks decidedly attractive. The only disappointing aspect of this deal, as I see it, is that Mr. Samuel has not seen fit to include any offer for Associated London's two classes of 6 per cent. Preference shares. Neither class has any voting rights and this fact explains why these Preferences have proved of little interest to a would-be buyer for control. My advice to the holders of the Convertible Preference and Ordinary shares is to follow their board's advice and accept Mr. Samuel's cash.
A Brick Share Under Par Hopes of a Conservative victory at the election are beginning to find' expression in the buying of cement, brick and building material shares on the quite logical argu- ment that if the promised expansion of the housing programme comes into being these companies will find themselves operating in more favourable conditions. Many of the leading cement shares are already standing at prices which do full justice to their high investment status. I think, therefore, that thoie in search of capital appreciation in this field will have to turn to the shares of some of the latterly depressed companies, whose prospects of recovery should now be improved. In this category are the 5s. Ordinaries of the Yorkshire Brick Company, now quoted in the market around 4s. 3d. This company has been in serious arrears with its Preference dividends but during the past financial year, which ended on March 31st, it succeeded in clearing off three years' Preference arrears, thus bringing payments up to January 1st, 1950. That was achieved despite a small falling off in trading profit from £23,571 to £21,090, and involved a reduction-in the carry-forward from £23,304' to £18,768. The point to notice, however, is that the arrears, now standing amount to only about £25,000 gross or, say, £13,000 net, and do not impose a really serious burden. In their latest report the directors record their hope that the results for the current year will be such as to enable consideration to be given to bringing the Preference divi- dend up to date, before 'the next annual meeting. If that forecast is realised the way will be open for a resumption of dividends on the Ordinary shares, which have received no distribution since 1938. This company has a reasonably strong balance sheet, with net current assets exceeding current liabili- ties by about £110,000. It should therefore be possible, once the earnings position gets a little stronger, for the directors to consider Ordinary dividends.
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