FINANCE ' AND INVESTMENT
By CUSTOS St °GET fears are now beginning to cast their shadow across the stock markets but so far the effect is seen mainly in fresh restraints on buying. After their recent heavy fall markets are being subjected to only light selling pressure, and here and there long-term investors prepared to ignore minor fluctuations are helping to create resistance. As 1 see the immediate prospect, it is dependent mainly on the pressure of borrowers' needs on available investment resources. Even if we are spared another twist of the dearer money screw it looks as if the investment market will move gradually on to a higher yield basis.
G.E.C. Financing
Not only the queue of Colonial borrowers but the big battalions of British industry are now moving slowly forward to make their demands on investment resources. This week new financing plans are announced by the General Electric Company and Boots Pure Drug Company. The G.E.C. issue is to raise just under £6 million and Boots are corning to market for £4 million—both substantial sums, which are to be raised by means of " rights " issues to the present Ordinary stockholders. As 1 have previously emphasised in these notes, opportunities are often provided on the occasion of a new issue for investors to acquire a stake in sound companies on decidedly attractive terms. This seems to me to be outstandingly true in the case of General Electric. Not very long ago the £1 Ordinary stock units were standing in the market at over 90s. In the recent setback they have fallen to 77s. 6d., with the result that in order to ensure the success of the issuer the 1,679,348 new Ordinary shares are now offered in the ratio of two for five at 72s. 6d. each. The new shares (nil paid) are likely to be avail- able in the market around 4s., which means that a buyer is, in effect, indicating his willingness to pay 76s. 6d. and has the advantage of avoiding the onerous 2 per cent. stamp duty and of paying little in the way of brokerage commission. At 76s. 6d. G.E.C. £1 Ordinaries are offering a yield of close on 6 per cent. on the current dividend rate of 221 per cent. As regards trading and prospects, the directors announce that results for the nine months of the current financial year, which ends on March 31st, have been satisfactory, but that the recent increase in the cost of labour and the present world shortages of raw materials are bound to make themselves felt in the electrical equipment industry. Nevertheless, they expect to be able to maintain the 221 per cent. dividend rate, a forecast whiCh does not look over-optimistic when it is recalled that for the year to March 31st, 1951, the dividend was paid out of available net earnings of over 80 per cent.
Boots' New Shares A similar situation—the financing of a general expansion programme whose require- ments up to the present have been met by bank borr9wings—has led to the issue 'of new Ordinary shares by Roots Pure Drug Company. In this instance the issue takes the form of 5,120,000 new 5s. Ordinaries at 16s. each, which are offered to the present Ordinary stockholders in the proportion of one for. three. Boots, as the investing public
is well aware, are a progressive and efficient organisation, and it is significant of the changed conditions in the investment market that the new shares are priced to yield 6f per cent. on the current 20 per cent. dividend rate. In this instance, when the present shares are quoted ex-" rights," the new shares should be available (nil paid) around 2s. 7/d. This gives a new buyer an opportunity of acquiring a stake in this progressive enterprise at the equivalent of 18s. 71d., or on a yield basis of nearly 51 per cent. Once again it seems to me that for those prepared to take a long view there is not much risk on these terms.
Imperial Tobacco Yield Any fears that increased costs, together with the difficulties on the raw material side, might involve a small reduction in the Ordinary dividend of the Imperial Tobacco Company for the year to October 31st, 1951, have now been dispelled. For the fourth successive year the total distribution on the £37,563,049 of Ordinary stock is maintained at 32 per cent., and from the preliminary figures it appears that this leading unit in the tobacco industry has again done well. Although consolidated net profit of the group has fallen from £11,325,487 to £10,092,605, this reduction clearly masks an improvement in trading results. The latest figure has been struck after providing £16,166,873, against £13,201,806, for United Kingdom taxation and included only £1,344,262 of special surplus which contri- buted £3,073,455 in the preceding year. On the basis of these figures the cover behind the 32 per cent. dividend is still somewhat meagre, but I think it is fair to read into the decision to maintain the rate the confidence of the board that, barring unforeseen cir- cumstances, profits will again make satisfac- tory showing in the current financial year. Following the announcement of the results Imperial Tobacco £1 Ordinary units have improved to just over 90s. At this level they are offering a full 7 per cent., whiCh seems to me to make adequate allowance for the trading risks.
Carreras' Bonus Surprise
Another reassuring piece of news from the tobacco industry has come from Carreras, who have decided to capitalise part of their reserves and distribute a 100 per cent, scrip bonus to all three classes of Ordinary shareholders. Once again it seems unlikely that the board would have embarked on such a plan without feeling reasonably confident about trading prospects. On this subject Sir Edward Baron spoke in encouraging terms at the annual meeting. He emphasised that the company had fully maintained its relative position in the trade and that sales had got off to a good start in the current year. Another point on which he reassured the shareholders related to the group's bank indebtedness. This, he said, appeared at an exceptionally high figure in the balance-sheet merely because the oppor- tunity had been taken during the past year to make use of a more generous dollar allocation to reinforce depleted stocks of raw leaf. The yield on the 2s. 6d. " B " Ordinary units, which stand at 12s. 6d., is 7 per cent. In my view there should be scope for recovery.
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