FINANCE AND INVESTMENT By CUSTOS As I suspected, the recovery
movement in markets has come up against hard facts. Gilt-edged, which have latterly been thriving on optimistic assumptions about the strength of sterling, have found no comfort in the April trade figures—the visible trade gap has widened—or in the April settlement of the European Payments Union. The obvious lesson of these figures is that, while there may be—and should be—benefits to come in from our import cuts, the position remains quite grim. International compe- tition is getting keener and other countries, as well as ourselves, are cutting down their import bills. As for the rest of the market, the falls in commodity prices, especially rubber, tell their own story. Most businesses are saddled with high costs and heavy taxa- tion and their selling prices are now falling. While I do not wish to be over-pessimistic, I find it hard to believe that any sustained recovery in security prices can take place in these conditions.
Marks and Spencer Earnings In these days investors are becoming accustomed, in my view wisely, to casting only half an eye on past results and con- centrating their gaze on the outlook. This explains why so many dividend increases have little effect on market prices and may even be accompanied by lower quotations when the dividend increase is flanked by a reduction in earnings. For the year to March 31st Marks and Spencer, the pro- gressive chain stores undertaking, reports a fall in net profit, after tax, depreciation and repairs, from £2,557,264 to £2,205,690. As the tax provision is down from £3,525,000 to £2,790,000 and repairs have cost £804,545, against £520,592, it is apparent that there has been a moderate falling away in gross trading results. In their statement the directors explain that the reduction in trad- ing profit has been due to the writing-down of stocks progressively as a result of the general fall in textile prices, the actual volume of business having increased by 15 per cent. The stock contingencies reserve has not been drawn on, and it is now proposed to increase this reserve to £1 million. Total reserves of this company now stand at £11,054,413, an increase of £1,722,196. What is apparent from these results is that a retail trading group of this kind cannot be entirely independent of its holdings of stock in a period of falling prices, but that with efficient organisation the setback in earnings and the writings down of stock which must take place can be restricted to modest proportions. The decision of the directors to raise the dividend by 5 per cent. 80 to per cent., in face of the profits decline, is at once an indication of reasonable confidence in the future and of the strong cover behind the dividend rate. Marks and Spencer 5s. " A " shares have fluctuated considerably in advance of and just after the dividend statement but have now settled down around 76s. 6d. To yield 54 per cent, they still look worth holding.
Vine Products Progress In face of the obvious handicaps imposed by the contraction of what may be termed marginal spending by the public, the latest results of Vine Products are surprisingly good. Alert management has resulted in an increase in trading profit last year from £565,210 to a new peak of £621,478. After taxation net profit has risen from £325,933 to £327,643, which represents earnings of nearly 50 per cent, on the capital as increased by the 100 per cent, scrip bonus. The board's decision to pay a 174 per cent. divi- dend, which is consistent with putting £100,000 to general reserve, must, therefore, be judged conservative. There is also a 24 per cent, cash distribution, not subject to income tax, which is being paid out of sur- plus on realisation of shares in an associated company. In his annual statement Lord Marchwood refrains from forecasting the future during a" period when trading con- ditions are obviously likely to be increasingly competitive. As to the incidence of the threatened Excess Profits Levy, he is con- tent to say that whatever the company may have to pay under this head is likely to be largely if not wholly covered by the esti- mated reduction in Profits Tax. The 5s. Ordinary units of Vine Products are now quoted around us. 3d. to yield just over 74 per cent, on the current dividend rate, without taking account of the special 24 per cent, tax-free payment. In the light of the company's past record and the strong financial position the shares look fairly valued.
Ship Earnings Outlook Investors in shipping shares have been reminded this week by the chairmen of two leading shipping companies that the outlook cannot be assessed simply in terms of the level of freight rates. In their annual state- ments the chairmen of the P. & 0. Steam Navigation Company and of the Union- Castle Mail Steamship have both emphasised the problems of ship replacement at the current high level of shipbuilding prices, and they have also given a warning that as regards the future the shipping industry has become saddled with high and increasing operating costs. In the P. & 0. report the problems surrounding the financing of fleet replacement are given considerable promi- nence. The directors point out that the annual cost of maintaining the group's fleet and of renewing other fixed assets amounts, at 1951 prices, to the formidable sum of £13,125,000. Against that they set the amount set aside by the group for deprecia- tion and to reserves of all kinds last year of £12,561,432. These allocations made a heavy inroad on the amount available for distribution to stockholders, but, even so, they fell short of what was required for renewal puposes, without taking into account the further sum needed to finance normal expansion of business. The same point is rammed home in the full accounts of the Union-Castle Mail Steamship Com- pany, which makes special reference to the inadequacy of the Inland Revenue deprecia- tion allowance based on original cost of ships. This sum, the report states, is by itself quite inadequate to finance the con- struction of essential replacement tonnage. Accordingly, it has to be supplemented by sums retained in the business out of profits. Both these leading shipping organisations are in the happy position of having built up over the years large cash balances, but both are now faced by heavy renewal programmes and, as is made quite clear in the full accounts, by steadily rising operating costs, which threaten the maintenance of earnings at the satisfactory levels attained in recent years. P. & 0. £1 Deferred units have receded in the market during the past fort- night from 51s. 6d. to 48s. 6d. and are now yielding 64 per cent. I still think that, having regard to the strength of the assets position, they should not be sold. Union- Castle have held steady at 43s. 6d., at which they yield a little over 54 per cent. As I have indicated, both companies are now facing conditions in which profits will be harder to earn than in recent years, but the shares are among the pick of the shipping market.
A Sugar Share Opportunities often arise when a company is embarking on new financing of acquiring a stake in a progressive enterprise on favour- able terms. A case in point seems to be provided by Jamaica Sugar Estates, who are now offering new 5s. Ordinary shares at par, which can be bought in the market at a premium of a few pence to give a gross yield on the 5 per cent. tax-free dividend of about 94 per cent. This company has estates of just under 12,000 acres in Jamaica, with a sugar factory, rum distillery, railways and rolling stock. Since 1939 its output has increased, and since 1941 this company, with other Commonwealth sugar producers, has had the benefit of an agreement with the British Government, under which most of its output has been sold to the Ministry of Food. Of last year's gross profit about 80 per cent, was derived from sugar and rather less than 20 per cent, from rum. A new Commonwealth sugar agreement signed last December is to run until 1959 with pro- vision for renewal. Under this arrangement the Food Ministry will purchase 1,640,000 tons a year—about 69 per cent, of the esti- mated output available for export—at prices to be negotiated annually. The price is described as" reasonably remunerative to efficient producers." The balance of avail- able exports will be sold at the world price, plus the preferential duty, in this country, Canada and other Commonwealth markets. During the past five years the amount earned tax free on the Ordinary shares of Jamaica Sugar Estates has ranged from 234 per cent. to just under 40 per cent., and dividends, which were maintained between 1947 and 1950 at 74 per cent. tax free, were raised to 10 per cent. tax free for the year to August 31st, 1951. Recently the Ordinary capital has been written up by a 100 per cent. share bonus. But it is estimated that if profits in the current year before tax, are the same as last year earnings on the capital now rank- ing after the new issue of shares which is now being carried through will amount to just under 154 per cent. tax free, which would clearly justify the maintenance of a 5 per cent, tax-free dividend. Costs have latterly increased, but the long-term agree- ment with the Ministry of Food holds out the prospect that net earnings should be well maintained. On the long view a rising standard of living now enjoyed by an increas- ing world population should find its reflec- tion in a higher total consumption of sugar. If one compares the 94 per cent, yield on Jamaica Sugar shares with that obtainable on other leading West Indian sugar shares one finds that there is an advantage of any- thing between 14 and 2 per cent.
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