FINANCE AND INVESTMENT
By CUSTOS THERE have been several adverse news items this week, such as Mr. Butler's declaration that our trade position is not yet satisfac- tory, and the rise in the deficit on visible account from £76.8m. in May to £79.7m. in June, and nothing has turned up to give investors any incentive to buy. With holiday influences now very much in evidence stock markets have therefore been distinctly subdued. The undertone remains firm, though. There is no selling pressure to speak of, and prices are on the whole bearing up well.
Packing Material Equities Pointers to the present state of trade have just been given by two companies engaged in the cardboard and carton industries. These are Cropper. and Co., and Colthrop Board and Paper Mills. Cropper and Co. holds a large investment in the capital of Colthrop Board. As might have been ex- pected, profits of each for the year now ended are lower, but Colthrop is raising its dividend from 25 to 274 per cent., and Cropper is paying 424 per cent., against 374 per cent. last year. Activity in the package-making industries is usually closely related to business pros- perity in general. It is known that they are now doing well, and presumably the in- creased dividends from these two companies express the directors' estimates of the future as well as their assessments of the past.
Both companies have a long record of well-covered dividends. Colthrop can be bought at around 60s., ex the dividend, to yield 9 per cent. Cropper now stands at 110s. cum the final of 30 per cent. On this basis the yield is 7.9 per cent. The higher standing of Cropper is a function of its greater spread of interests and its closer relation to the final consumer.
Progressive Timber Share The timber industry has a big part to play in the housing programme, and in spite of all the difficulties that stem from the various measures of Government control and semi- control it is obviously measuring up to its responsibilities. A clear indication of the success with which it is tackling its prob- lems comes from Denny Mott and Dickson, importers and merchants of softwoods and hardwoods, whose preliminary statement for the year to March 31st last has just been issued. The directors are able to report trading profits even higher than those of the previous year, the boom year for so many concerns handling primary products of all kinds. This is a highly satisfactory result, only marred by the sharply increased pro- vision thought necessary to meet U.K. taxa- tion. Thanks to this regrettable need the amount available for distribution is some- what lower than last year. However, for the third year in succession, the directors are adding two percentage points to the Ordinary dividend. This time, moreover, instead of a basic 6 per cent. plus a bonus, which is what has hitherto been forthcoming, they are announcing the payment as a straight dividend of 18 per cent. Such a measure of consolidation is a welcome sign that the rate is unlikely to be reduced.
In fact, the scale of retained earnings makes it clear that there should still be room in the future for further increases in the distribution. In previous' years profits have been four or five times as large as dividends, and even the latest dividend is covered something like three and a half times. The progressive record of the com- pany suggests that shareholders can expect to participate further from any increase in the prosperity of the company.
Isaac Holden Interim The resumption of interim dividends by Isaac Holden and Sons, the Bradford wool- combers, is an important landmark in the company's progress. The last interim dividend was a payment of 5 per cent., declared in February, 1951. That came from the profits of the twelve months ended June 30th, 1951. After that the company paid a final of 10 per cent., but in the five months from July to November, 1951, it registered a reaction to the wool slump then under way, making a loss equal to the net profits of several preceding years, and was unable to pay a further dividend until January of this year. Then, out of the profits of the twelve months to November 30th, 1952, the directors proposed a payment of 74 per cent.
By this time the business was again making satisfactory profits, and the payment was covered three times. However, it was a far cry from 74 per cent. per annum to the 15 per cent, previously paid.. The latest news is an interim of 6} per cent. for the current year. No indication is given with this of a possible rate for the final dividend, and any conjecture on the subject is liable to be falsified by events. All the same, it is reasonable to suppose that so long as trading conditions do not deteriorate the next pay- ment will be no less than the interim, while, if the cover for the dividend is anything like last year's, there would be room for a restoration of the 1951 rate. Accordingly, my inclination is to regard the annual rate as a probable 124 per cent. and a possible 15 per cent.
Activity in the woollen industry is now at a high level. During May the rate of top- making was the highest since the war. It was 65 per cent, larger than a year ago. The Isaac Holden group abandoned top-making activities last year, but this rate of produc- tion is a fair measure of the tone in the combing side of the industry. At the current price for the £1 shares of 31s. 3d. ex the interim the yield of the assumed total dividend of 124 per cent. would be 8 per cent. If 15 per cent. were to be paid it would step the return up to 9.6 per cent.
Seven Years of Initial Services In itself there is nothing astonishing in the seven-year profit record published in the full accounts of Initial Services for the year to March 31st last. After slight setbacks in 1949 and 1950 the trading surplus has gone impressively ahead, and the latest figure is well over double the amount dis- closed in 1947. That is a good performance, but many other concerns can boast a similar achievement. What strikes the eye about the record of Initial Services is that the directors have maintained the upward trend without following the example of so many other boards and putting to reserves amounts equal to two or three times the dividends paid. In fact, until 1952, published earnings never exceeded the distribution by as much as a half.
The reverse side of this medal is of course that the market regards the dividend as rather thinly covered, and the price is apt to be correspondingly depressed. Moreover, the rate of dividend itself has hitherto been conservative in the extreme, having been pegged at 20 per cent. ever since 1947. Now, however, it has been raised to 224 per cent., and the 5s. shares have appreciated to 15s. 9d., at which the yield of this payment is 7.1 per cent. That is perhaps rather fine for a security that is not backed by a propor- tion of reserves comparable to that of the blue-chip class, but there are one or two points to bear in mind as countervailing factors, notably the probable understate- ment of the value of the freehold properties, and the relief to be expected when Excess Profits Levy expires at the end of this year. Last year, it is worth noting, E.P.L. took the equivalent of a 124 per cent. dividend. With its wide range of activities the group has great possibilities as a growth investment.
George Sturla's Capital Profits Some of the not very numerous class of shares on which the return consists partly or wholly of tax-free payments out of capital profits are regarded in the market with a certain lack of enthusiasm. Partly this is no doubt due to the feeling that a company that pays such dividends is to some extent living on capital, and partly it reflects the difficulty of deciding what dividends will be forthcoming when the source of the tax-free payments eventually dries up.
Investors on the look-out for income need not give too much attention to these mis- givings. In the first place, no company can lawfully make such capital payments except out of realised accretions to capital. Secondly, it is always possible to consult the record of profits on revenue account to make sure that the earning capacity of the business is not being impaired, and that there are trading surpluses out of which ordinary dividends can be paid.
A small but progressive concern in this class is George Sturla and Son, who operate a group of retail stores in industrial districts of Liverpool and Birkenhead, dealing in drapery, footwear, and household goods. By far the greater part of the trade is con- ducted on credit terms under a voucher scheme, and the liquid position of the company is thus habitually strained. Mersey-, side does not always participate to the full in such prosperity as the country as a whole may be enjoying, but the Sturla, record shows no sign of depression.
Earnings on the ordinary capital have risen steadily in the past few years. The latest accounts show that in the year to February 28th last they were 350 per cent. against 318 per cent. the year before. Out of this the dividend on the ls. shares is 100 per cent. for the year, against 80 per cent. previously. In addition there is a payment out of capital profits of 15 per cent. not subject to income tax or surtax. At the present price of 10s. cum nearly 6d. of dividend the yield of the 100 per cent. dividend is 10.5 per cent. Grossing up the 15 per cent. payment at 9s. in the £ makes a total return of 13.2 per cent. There is at present enough in the capital reserve to allow two more payments of 15 per cent.
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