FINANCE AND INVESTMENT
By CUSTOS
MARKETS are still behaving suprisingly well. I say " surprisingly " because already indus- trial equity shares have recovered the ground lost immediately following the dividend freeze announcement and because of the obvious threats to earnings implied by German and Japanese competition. Under- lying the firmness of quotations is, of course, political hopefulness and the widespread conviction that for a long time ahead rearmament assures a high level of industrial activity. So far from the average investor showing some anxiety to "go liquid" and await a better buying opportunity, there is evident in many directions what amounts almost to a horror of cash. The fear of inflation has got a firm grip on investment mentality and leads to a general wish to hold good equities and a disinclination to hold depreciating money. The cynics will say that some day all this will be changed and com- modity prices and stock markets will fall back. Perhaps they will, but few people are yet prepared to expect any real deflation even from a Conservative Government. The inference must be that present market trends --with firm equity prices and with the specu- lative emphasis on overseas securities and liquidation stocks—are likely to continue. The outlook for gilt-edged is as obscure as ever. Once again the external balance of payments problems is casting a slowly- lengthening shadow, and the savings situation shows no sign of recovery. It is kflear indi- cation of a healthy technical condition in the market that gilt-edged prices are somehow holding their ground. They may well con- tinue to do so unless the incipient weakness of sterling develops further in the coming weeks and months.
• International Tea Expansion
Among the companies which would not have increased dividends even if thtre had not been any freeze is the International Tea Company's Stores. There is an ample margin of earnings behind the ordinary dividend for the year to April 28th which is maintained at 16 per cent., but Mr. Frank Wilson in his review calls attention to several factors suggesting that the outlook should be viewed cautiously. Increased prices are partly responsible for a higher turnover reflected in a modest rise from £1,700,907 to £1,817,917 in the group's trading profits. On the other hand the group is feeling the strain on its liquid resources of financing sulaantially larger stocks. At £4,651,767 the stock item is nearly £700,000 higher and is flanked by a fall of about £180,000 in Alings of cash and gilt-edged securities. liae is yet another indication of industry's financing difficulties in terms of heavy taxa- tion. On the question of profit margins- all-imprant in the food trade—Mr. Wilson emphasises& encroachment on margins of the general uptrend in expenses and in par- ticular wages, transport and maintenance of property, plant and equipment. Fortunately, the group has the advantage of alert manage- ment which, up to the present, has succeeded in matching rising costs by- expansion of business. International Tea 5s. ordinary units stand at 17s. 3d., offering a-return of
• just over 4f per cent. Although I do not regard them as having much scope for early capital appreciation, they are a sound indus- trial holding.
Burberrys' Recovery A year ago the chairman of Burberrys, the clothing manufacturers, gave a warning that consumer resistance to high prices might have a depressing effect on sales. The sharp improvement now recorded for the year to- March 31st is the more encouraging. - Net profits have risen from £90,749 to £145,597, with the result that ordinary dividends are being resumed with a payment of 5 per cent. This requires' only a little over £17,000, but as the company's previous dividend—for 1947-48—was also 5 per cent., this is the maximum payable under the dividend freeze. In their preliminary statement the directors attribute the recovery in earnings mainly to larger exports, this side of the company's business representing 50 per cent, of total turnover against 40 per cent, in the preced- ing year. Following these results the £1 "A" ordinary shares have moved up from 9s. 9d. to 1 1 s., at which they still yield just over 9 ...per cent. They seem to me a fairly attractive speculation.
John Brown Merits I have outlined in recent notes the merits of Vickers, Cammell Laird and Guest, Keen and Nettlefolds in the new conditions in which these companies operate now that they have been divested of their steel plants. Another undertaking which is worth examin- ing against a similar background is John Brown & Co. Apart from its Clydebank ship- yard where they are now building a large pas- senger liner, several refrigerated cargo ships and large tankers, the company has extensive engine works, an important interest in the machine tool industry, a stake in the railway carriage industry, in the manufacture of oil refining plant and in the aircraft industry. All these activities, which Lord Aberconway reviews in encouraging terms in his' annual statement, indicates the scope for future growth, and there is plenty of evidence in the balance sheet that the proceeds of steel corn-
.° sjao_uld enable the group to finance d1Mtit gr a long time ahead out of its own resoines. At March 31st, holdings of cash and Bjtish Government securities amounted to oyer £7.000,000. For the past year the compaiiy paid the equivalent of 14.3 per cent, on a capital doubled by a 100 per cent, scrip bonus out of earnings of nearly twice that rate. On the controlled rate of 12.64 per cent. the £1 shares, at 50s., offer the satisfactory return of 5 per cent.
White Pass Yukon Hopes A year ago I recommended a purchase of the £100 income debentures of the White Pass and Yukon. Railway on the theory that whenever this company carried through its much-needed capital reorganisation and
refinancing plans, these debentures would be repaid at par. The market price was then just over £80. It is now around £92, a moderate improvement, but I shall be dis- appointed if hopes of repayment are not fulfilled before the end of this year. The company's reorganisation plans will shortly be brought forward under strong City and Canadian auspices and Will include the formation of a new Canadian company. This new company will issue 41 per cent, debentures and 51 per cent. preference shares at par, the preference having conversion rights into the reorganised ordinary capital. The existing consolidated mortgage deben- tures which have large accumulated interest arrears, and the income debentures will be paid off. All this may require a month or two to carry through, but meantime the income debentures at 92 should not be sold. On the contrary, if stock is obtainable around 92 which, allowing for stamp duty and com- mission, would mean an all-in cost around 95, it should be bought.
An Overseas Share There is still ample evidence that many investors, and especially those in search of capital appreciation, are looking among overseas shares rather than domestic securi- ties whose long-term is well as short-term potentialities are circumscribed by dividend control. This explains the buoyancy of
Canadian stocks in London and a renewed interest in South African enterprises. In the latter category a share, essentially for long- term holding, which can lay claim to real investment calibre, is the 5s. ordinary of First Electric Corporation of South Africa. This company, which has first-class manage- ment, works in close association with the giant Associated Electrical Industries group here. It produces modern electrical equipment to A.E.I. designs and in conformity with the standards and specifications of Metropolitan Vickers and British Thomson-Houston. The group is largely self-contained and the major part of a reorganisation and expansion scheme was carried out last year with a resultant trebling of production. The divi- dend position? Rather unusual in the sense that having paid 71 per cent, for each of the two preceding years the company has decided to conserve resources for the time being to help finance the development pro gramme. Any further funds required will be provided out of borrowings. Clearly, this is a " growth " situation in which the buyer of the shares, which are quoted around 15s. 6d., must be prepared to look well ahead. Prospects look good against the background of long-term capital projects of over £100,000,000 by the South African Elec- ,tricity Commission, £194,000,000 by the South African Railways and Harbour Board and the continuing plant requirements of the mines and a wide range of industrial enter- prises. There is reason to believe that earn- ing capacity will have reached the point by the end of next year at which a dividend will be justified, making the shares worth more than their present price.
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