FINANCE AND INVESTMENT By CUST ' OS THESE are depressing days
in the stock mar- kets. Whatever doubts one may feel about the new Government's determination or ability to put teeth into its disinflation pro- gramme, markets are behaving as if not merely disinflation but its uglier brother deflation were in early prospect. Gilt edged prices, as I forecast last week, have been unable to stand up to the Bank Rate rise and equity shares have fallen partly through the downward pull of gilt edged but much more through vague fears of sterner times for industry ahead. As one broker put it when asked by a bewildered Conservative investor to explain the post-election slide: "The headmaster is back." That is an over- simplification but it contains a large element of the truth. Investors have suddenly been made aware not only that the country's financial position is serious—which surely most of them ought to have known—bit that something drastic is going to be done about
it. That explains the increase in selling dur- ing the past week and, even more important, the virtval cessation of buying. It is diffi- cult to avoid the conclusion that the downward drift of prices may continue.
Good equities to yield 5 per cent. or more, liquidation shares and depressed shares with recovery prospects now look the best field for investment.
Case for Gold Shares ?
In its new mood of scepticism in which the market is apt to enjoy getting the worst of all worlds, gold shares have fared only slightly better than industrial equities, in spite of the obvious fact that after their long two-year slide they stand to gain from any real deflation. What has depressed the shares of the producing gold mines since their sharp rise immediately preceding and following the devaluation of sterling in. September, 1949, has been the steady encroachment of costs on profit naargins. How severe this encroach- ment has been is strikingly demonstrated in the figures of working profits. In the case of the marginal high-cost mines net earnings' have been practically erased and most of ;those companies would have already been ?n the red but for sales of gold at premium prices in the free market. The question is now whether inflation of costs has at long last been definitely arrested, in which case gold shares at their present levels would seem to be due for some recovery. My own feeling is that this may be about the turn, but. that there are still so many imponder- ables in the outlook as to rule out any sustained rise in market quotations. All that can be said at the moment is that tech- nically this market looks sold out and events seem to be moving in a direction which could bring about at least a modest recovery.
British Celanese Issue
As I have said, one of the influences now tending to pull down the level of Industrial equity share prices, quite apart from the prospect of dearer money, is the heavy capital requirements of British indus- try. The long expected rush of new Indus-
trial issues has now begun, and it is already plain that many tens of millions of new money will be sought during the next two or three months. Some of.it will be raised through new issues of Debenture stock and Preference capital, but the bulk of it, so far as can be seen, is likely to be provided through issues of new Ordinary shares as " rights " to present Ordinary shareholders. The new financing plans of British Celanese are typical of what may be expected. This company is issuing new 10s. Ordinary shares, in the proportion of seven for every ten at present held, at 30s, each, to bring in £4,500,000, to finance the construction of the first unit of a new spinning plant at Wrexham. In anticipation of these propo- sals the market price of Celanese 105. Ordinaries has fallen over the past fortnight from 42s. 6d. to 34s. 6d., and the new shares (nil paid) are now obtainable around 2s. 3d. premium in the market. They seem to me to be worth taking up around this price, in view of the very ample earnings cover behind the dividend and in the light of the com- pany's earnings prospects. Reading between the lines of the board's circular one seems safe in putting the annual dividend rate at 16 per cent., so that at 32s. 3d. he shares are priced to give a yield of just under 5 per cent.
Standard Motors Dividend
Like most other units in the motor manu- facturing industry, Standard Motors have achieved a sharp increase in earnings. For the year to August 31st the trading profit, after setting aside £250,000, against nil, for contingencies, has risen from £2,885,341 to a new record of £3,668,085, Although the taxation charge is substantially higher, with income-tax provision at £910,000, against £515,000, and Profits Tax calling for £440,000, against £215,000, net profit, after tax, has risen from £578,318 to £853,069. On the strength of these earnings the Stan- dard Motor board are fully. justified in pay- ing a 12. per cent. dividend on an Ordinary capital which has been increased since last year by a five-for-two scrip bonus. This 12 per cent, compares with•30 per cent, for the preceding year on the smaller capital then ranking, but the true comparison is with a dividend of 8.6 per cent. The 5s. Ordinary shares have attracted a good deal of specula- tive buying during the past few weeks in anticipation, of good results, and following the profit and dividend statement the price has come back from 9s. lid. to 8s. 9d. The yield is now approximately 7 per cent., which seems to nie to make sufficient allowance, on a well-covered dividend, for the obvious uncertainties in the motor trade outlook.
Montague Burton Surprise Ordinary shareholders in Montague Bigton, the Leeds clothing concern, must be disconcerted by the views expressed by their chairman on dividend policy. Here is a company which has held down its Ordinary dividend at 12 per cent, for the sixth succes- sive year, in spite of a substantial increase
in profits which, after allowing for the much larger provision required for taxation, have covered the dividend rate by a wide margin. With the ending of the threat of the dividend freeze shareholders in a company of this kind would naturally have expected that at long last they might be given some modest , participation in the company's increased prosperity. Nothing of the kind. Sir Montague Burton now declares his view that "the restrictions on dividends and restraints on wages should remain until the export trade has reached a satisfactory level and has been firmly re-established." These argu- ments seem to me to do something much less than justice to the equity shareholders' position. Why should the Ordinary share- holders, who stand to take the knocks if things go wrong, be treated as though they had merely put up fixed-interest capital ? Everyone will subscribe to the need for moderation and restraint in dividend policy, but Sir Montague Burton is surely going much too far in advocating dividend peg- ging. For the year to March 31, 1951, this group's profit was nearly doubled at £1,036,509, against £550,226. The Ordinary dividend requirement is a mere £143,781, a figure which may be compared with the £1,324,333 provided for taxation and with the £400,000 which has been appropriated to theaeneral reserve. Montague Burton 10s. Ordinary shares are now quoted around 22s. 3d., at which they yield- 54 per cent. oil a well-covered 12 per cent. dividend. Although the chances of an increase, in the light of the chairman's remarks, are remote, the shares seem to me to be reasonablY valued, bearing in mind the strong financial position and the sound management.
A Share for Recovery
In the category of shares now quoted well below par but with good recovery prospects are the £1 Ordinaries of Henry C. Stephens, the ink and stationery manufacturers. Whereas until 1947 this company had a successful financial history, paying a regular dividend of 5 per cent, on its Ordinary capital, with the shares quoted between 20s. and 27s. 3d., results for the past two years have been particularIV disappointing. Chiefly owing to the rising costs profits have given way tp losses, and Preference divi- dends are now in arrears from December 31, 1949. In the same doWnward process the Ordinary shares have fallen to 75. .9d. Hope of recovery was. given in the latest annual report issued in August, when it sval announced that a new managing director had been appointed, as well as a new finance director, to help restore the company's for- tunes. Considerable progress has now been made in reducing costs and improving to, margin of profit, and the chairman intimate° that on the evidence in the middle of the year the company had turned the coma and that the current year should show a balance on the right side. The PrefereileS arrears are trifling in relation to what shoat° be well within the company's earning power. in reasonable trading conditions, so th.a.! there should not be any unduly long delaY in a resumption of dividends on the Ordinaq capital. With the Ordinary shares. 0" quoted well below one-half of their rf, value this seems to be an opportunity Lo` regarding them as an attractive loek-tIP
p
Previous page
