FINANCE AND INVESTMENT
By CUSTOS
THIS week the Stock Exchange has witnessed the rare spectacle of a strong recovery in equity shares and a steady improvement in -- gilt-edged prices. The obvious explanation is that for one reason or another selling has dried up and that the majority of investors are still preferring to hold securities rather than cash. In the industrial ordinary share market the rally, in face of the threatened statutory dividend limitation, has been remarkable. On the eve of Mr. Gaitskell'i fateful speech the Financial Times index number of industrial ordinary share prices stood at 132.9, the level to which it had fallen in the preceding fortnight from 136.2. Four days after the news of the dividend freeze the index was down to 127.1. As I write it is back to 132.6 and there is every indication that the pre-freeze figure will be reached in a matter of days.
Inflation Fears
What has happened ? Let nobody sup- pose that if it becomes law the freeze is a negligible factor in the investment equation. As I have pointed out, it will doubtless be amended to temper the wind to the shorn lambs, but it could not fail to rob many equity shares of much of their appeal. The plain truth is that investors are willing to indulge their political hopes to the extent of holding on to their equities until the election takes place and the result is known. Only a little buying has done the rest. Jobbers are again short of stock and a modest replenishment of portfolios has set prices on a recovery curve. The rise in gilt-edged ? Illogical in many respects but easily explain- able on technical grounds. The institutions, after holding off the market for so long, were bound to come in again as buyers, and may well continue to give gilt-edged some support around current levels. But there is no evidence yet that the fear of inflation, either in the United States or over here, has been much reduced. Inflation psychology still underlines the behaviour of markets and must help at least to maintain equity prices around today's levels.
Triplex Glass Dividend
To the uncertainties arising out of divi- dend limitation itself—will it be implemented and, if so, in what amended form ?—have now been added the uncertainties surround- ing the distribution policy of boards of directors. While the majority of companies which have announced dividend decisions since Mr. Gaitskell's speech have seen fit to toe the new line, some have not. The first sign of revolt came from Geevor Tin, the successful Cornish tin-mining concern, which raised its dividend quite sharply on the strength of a spectacular rise in profits. The chairman pointed out that the board's deci- sion had been reached before the announce- ment of the dividend freeze and he doubtless feels that this is a case for special treatment. I agree, but if the freeze does become law and the company fails to get some dispensa- tion the dividends paid during the freeze period will have to be reduced by the " excess " just declared. A more important instance of revolt which raises more funda- mental problems is the increase in dividend announced by Triplex Safety Glass. This company, of which Sir Graham Cunningham is chairman and managing director, is paying 15 per cent. against 124- per cent. Under dividend freeze rules the permissible pay- ment=the average of the 10 per cent. and 12f per cent. paid in the two base years— would be 11+ per cent. Sir Graham makes a spirited defence of his decision by relating the company's dividend policy to its policy on wages. Some time ago the board declared their intention to increase wages in accord- ance with the rise in the cost of living and increases have in fact been granted during the current year. This arrangement has met with the approval of the Trades Unions con- cerned. So, the Triplex board argue, it is' surely right to pay a little more to the com- pany's stockholders, who number nearly 9,000, who equally with the employees must be suffering a higher cost of living. The justice of this contention seems to me to be unassailable. Whether it is expedient to pay dividends above the threatened statutory level at the risk of having to cut the rate sharply in future years is another matter. On balance I think the Triplex directors have acted wisely, and shareholders have been frankly warned that if the freeze becomes legal the dividend will have to come down to 7f per cent. The 10s. shares at 30s. are yielding 5 per cent. on the 15 per cent. just announced. I think they are fairly priced.
Two Shipping Surprises
There is no lack of good news in these days from the shipping industry. Although now well below its recent peak, the tramp freights index is holding well around a level which gives shipowners a high margin of profit. Shares like Silver Line, Dene Ship- ping and Reardon Smith are, in my view,.still good value. For the big liner companies current conditions are also favourable, even If the increase in profit margins is less steep than for the tramp owners. Agreeable sur- prises from this section of the industry have just been announced by the P. & 0. Steam Navigation and Furness, Withy '& Co. A 50 per cent. share bonus for holders of P. & 0. deferred will go some way towards bringing the issued deferred capital into closer relation with the tremendous asset values of the group, although, under the dividend freeze, the dividend will have to be reduced in precise ratio to the proposed increase in capital. It is an indication of the current mood of optimism in Throgmorton Street that the price of the deferred stock units has reacted to the bonus plan in much the same way as if the dividend freeze had not been heard of. From 62s. 6d. the £1 units have risen sharply to 66s. 9d. On the increased capital the permissible dividend will be, 9+ per cent., so that the indicated yield is about 4+ per cent., allowing for the proposed 1 for 2 share bonus. Bearing in mind the strength of the group's assets posi- tion and the ample dividend cover, I do not think the market rise in F. & 0. deferred has gone too far.
A rise from 32s. 9d. to 35s. 6d. in the £1 ordinary shares of Furness, Withy has been the market reaction to this company's divi-
dend announcement. For the year to April 30th the directors have declared a payment of 9; per cent. Group net profits, after tax, &c., have risen from £1,145,905 to £1,515,308 and the board, following their traditionally con- servative policy, are raising the transfer to fleet replacement account from £200,000 to £340,000 as well as carrying forward £25,000 more, at £323,979. From the standpoint of prudent company finance, therefore, the pro- posed payment of 9f per cent., which com- pares with 8 per cent. for each of the two preceding years, requires no defence. But how does the board's decision tie up with the dividend freeze ? Apparently the view has been taken—and acted upon—that the pay- merit in March of this year of a 2+ per cent. special dividend 'to commemorate the com- pany's sixtieth anniversary has raised the permissible dividend rate—the average of 8 per cent. and 10+ per cent.—to 91 per cent. Here is just one more instance of the diffi- culty of interpreting the White Paper. Many would argue that this special dividend paid more than five months after the last final does not relate to the base period. Others, including the company's board, take a different view. Nobody will know the answer until the–dividend rules are set out much more clearly in a Bill. Meantime, I do not think Furness, Withy ordinary share- holders have much to worry about. On a 94 per cent. dividend, covered by a comfortable margin of earnings, the £1 shares return 54 per cent. They should not be sold.
A High Yield
Under the threat of the dividend freeze there has naturally been a tendency to look for industrial ordinary shares offering high yields even on dividend rates which may have to-be somewhat reduced. Among these the 5s. ordinaries of Car Mart, the motor distributors, seem to me to merit attention around the current price of 17s. 6d. This company has for many years held exclusive or partially exclusive agencies for London, Middlesex and Essex of Austin, Standard, Triumph and Ford vehicles and their spare parts. For the past three years profits, after depreciation, have shown average earnings on the ordinary capital of over 50 percent. and dividends have been 30 per cent, for the year to November 30th, 1948, and November 30th, 1949, and 35 per cent. for the year to November 30th, 1950. The standard rate for freeze purposes is therefore 321 per cent. At 17s. 6d. the dividend yield on 32+ per cent. is 9+ per cent., a return which obviously makes a considerable allowance for the risks of the car-distributing business. On assets the shares also look good value. At November 30th, 1950, the balance sheet showed surplus liquid assets, which included £397,000 in cash, of £533,541. Adding in
the book value of fixed assets at £251,476 there was £785,017 available for 1,600,000 ordinary 5s. shares, or the equivalent of just under 10s. per share. In February, 1947, freehold and leasehold properties were valued at £631,000, a net appreciation of £374,000. If one adjusts for this item the total net assets are brought up to £1,159,000, or 14s. 6d. a• share. As to, the outlook, the distribution in London and the Home Counties of three of the largest British makes of popular cars, together with the profits of the used car and repair depart- ments, should insure a high level of earnings for a long time ahead.
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