WISE INVESTMENT
So far, so good. With a little leniency from the banks and from the stronger brethren towards tfie weaker brethren in the market, the settlement-day hurdle has been jumped and investors have been allowed, after all, top sit in their Coronation scats without worrying overmuch whether they could really afford them. The rally, as I anticipated; his been substantial, and has extended to virtually every section of the Stock Exchange, from gilt-edged to the more speculative mining shares. Just as, on the downgrade, comparatively light selling brought sharp falls in quotations, so, on the upswing, moderate buying has been sufficient to cause jobbers to mark up their prices. The rally, like the slump, has thus been largely technical, but it is safe to assume, all the same, that markets- are, stronger after the shake-out, for over-bought speculators have been compelled to take in sail.
What is the prospect now that the Great Budget Scare has passed ? I think it is satisfactory but not exciting. In an environment of rising raw-material prices and labour costs and with the international currency and gold-price- problem still unresolved, investors can scarcely expect that capital appreciation will be handed to them on a platter. So far as gilt-edged and other fixed-interest securities are conceftied, I do not think the hardening of interest rates will be rapid enough to cause a sharp decline, but over a period a gradual fall in this market must be anticipated. Movements in industrial ordinary shares will be selective, with the balance tipped in favour of interests dependent on primary production rather than manufacturing enterprise. I should therefore prefer, as a broad classification, shares in commodity-producing, shipping and merchanting companies to those of companies manu- facturing or dealing in finished products in competitive conditions where rising costs cannot easily be translated into higher selling prices.
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HOME RAILWAY PREFERENCES
In view of the rally in home railway stocks, readers may feel that I did less than justice to the railway position in these notes in February. I then concluded that while gross traffics showed every sign of maintaining their upward trend, the net gains to the companies' revenues would be drastically cut down through rising expenditure. On this diagnosis I prescribed the preference stocks as attractive investments for their generous yields but could find comparatively little merit in the ordinary stocks. I see no adequate reason just yet for altering this view. Gross receipts are running to form about 3 per__ cent-. above last year's level, and should derive some benefit from the projected rise in freight rates, but expenditure is mounting and whenever net revenue does rise materially, labour is there ready, knocking at the door. .
In the preference market there is good value to be had at current prices. London, Midland and Scottish First Prefer- ence, at 841, yields £4 15s. 6d. per cent. The 4 per cent. dividend was covered last year with a margin of £2,795,389 of net revenue. Behind this stock is the 4 per cent.. 1923 preference, with a smaller margin of cover, but offering a yield of £5 6s. per cent. at 76i.
London and North Eastern First Preference, at 694 offers the very generous return of £5 17s. per cent., the 4 per cent. dividend having been covered by the slender margin of only £330,000 in 1936. This year the prospect, as I have said, is rather brighter, so that in each case the dividend should be maintained and the cover be moderately strengthened. * * * * TRANSPORT " C " POSITION What shall I say of the London Transport position, and especially of the tribulations of the holders of the " C " stock ? At the moment I find it hard to be optimistic, and even at 85 Transport " C " seems dear by comparison with, say, Southern Railway Preferred at 92. On the basis of the 4 per cent. rate now in forte Transport " C " is yielding roughly £4 15s. per cent., while Southern Preferred, which pays 5 per cent., yields nearly 5} per cent. The Southern issue, it is true, is receiving its maximum rate of dividend, but the traffic outlook is good and the cover available should gradually improve. Theoretically, there is more scope for Transport " C," on which the " standard " rate envisaged by the London Transport Act of 1933 is now si per cent., but it is difficult to see how anything higher than the current 4 per cent. rate is going to be earned or paid either this year or next. • _ Failure to pay 51 per cent. for the year ending June 30th, 1938, will raise quite a pretty problem in that the " C " stockholders will then have the right to appoint a receiver and put the Transport Board into liquidation. The Act prescribes that such power can be exercised if the Board fails in respect of three consecutive. pears, ofwhich the first shall be not earlier than the year ending- June 3oth, 1936, to pay interest on the " C " stock at the standard rate -fixed for those years. So far as can be judged at present, it scarcely seems possible that the Board will be able to pay the -standard =rate; but I cannot see what advantage the " C " stoCkhOlders: could gain if they actually availed themselves of their powers. , After all, few people doubt that the Board is energetically, and ably administered ; the Board's and the " C stockholders' diffi- culties arise from economic factors which cannot be readily controlled. .
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ENGLISH ELECTRIC PROSPECTS
Fears of the National Defence Contribution seem to have precipitated the fall in English Electric ordinary shares from 36s. 9d. to 33s., but I shall be surprised. if this company is called on for much, if anything, under the proposed tax. Seven years ago English Electric was compelled to write down its capital drastically by a reconstruction scheme, so that the present issued share capital of £2,579,312 is very Much less than " the original .cost of assets " which the Chancellor has stated to be the capital basis for N.D.C. Despite the spectacular recovery in the company's earnings in the past three years the profits still represent so little above the 6 per cent minimum exemption limit that any tax contribution must be comparatively small. That being's°, the shares "shOlik! now be worth picking up as a lock-up investment. . Profits, after debenture interest, rose last-year from £130,142 to £245,306, and although no ordinary dividend was paid, roughly 15 per cent. was earned on the ordinary capital. Preference dividend arrears were cleared off, and the outstanding high-cost debenture stocks were replaced by a 4 per cent. issue. This year earnings are rising still further, and the company has a record volume of will boOked at satisfactory prices. Whether the board will Pay an interim dividend, as some people hope, I will not predict, buethe necessary profits are being made. My own guess -is that the ordinary dividend this year will be at least 7} per cent., and that earnings will be approximately 20 per cent., always provided nothing happens to upset the general recovery in trade. * * * - •
Venturers' Corner
For those who do not mind running the political risks of the Far East—are they really much greater than those of Europe ?- the £ro shares of- the British and Chinese. Corporation are an interesting speculation. The shares are £5 paid, and therefore carry an uncalled liability, and for 1936 the dividend paid was 15 per cent. less tax, against ro per cent. tax free for each of the two preceding years. At their present price of £i°, the shares thus offer a yield of 7} per cent., which seems to me an adequate compensation for the risks involved. Moreover, the corporation, which is shrewdly administered, has built up an immensely strong reserve position, having accumulated a general reserve of £325,000, apart from a large suspense reserve, against a paid-up capital of on1yD25,000 The outlook now seems to be brighter than for many years, China's economic recovery having recently found reflection in rising railway traffics which, in turn, have enabled the Finance Minister, to resume payment of interest on various Chinese railway loans. There should be more scope, therefore, for the Corporation's main business, which consists in the finance and development of China's railway systems. As for the uncalled liability, that should not prove really embarrassing, as it is shortly to be reduced, not by a call for cash, but by increasing the amount- paid up on the shares by a bonus [Readers' enquiries, Or requests for advice, regarding particular shares will be answered periodically as space permits. Corre- sPondeMs:who do not desire their names to appear should append initials or a pseudonym to their queitions.
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