FINANCE AND INVESTMENT
By CUSTOS
THESE are testing days for investors. No sooner had markets begun to recover their poise—and move cautiously forward—after the bolt from the blue in June than they have run into another head-on collision with international politics. As I write, prices are being marked down precipitately, not because there is any widespread rush to sell, but simply because there are no buyers. For the moment dealers are taking the view that most people, at the pre-crisis level of prices, would rather sell than buy. As a protection against actual selling they quote a lower and wider range of prices and, as this week's experience has shown, the effect is to deter most would-be sellers and give investors the necessary breathing-space in which to steady their nerves. To suggest either selling or buying at this delicate stage would obviously be to .take a view of international politics. Until the horizon becomes at least a little less threatening all but the most bold or light-hearted will be content to keep to the side-lines--and watch.
Dorman Long Assets Iron and steel shareholders must be viewing with mixed feelings the remarkable rise in earnings which the industry is now reporting as the direct result of the capital development programme. Under the provisions of the Iron and Steel Act companies scheduled for take-over under the nationalisation plan are precluded from passing on any of the benefits of past modernisation and expansion schemes to the Ordinary shareholders. In consequence, the large sums avail- able over and above the amounts required to maintain dividend rates are being ploughed back into the business. The effect is to underline the injustice of the nationalisation take-over terms. A glaring case is that of Dorman Long and Company, whose trading profits for the year to September 30th have risen from £5,109,578 to a new peak of £6,216,485. Although depreciation and taxation have called for larger sums the maintenance of the 8 per cent. dividend, which absorbs the meagre total of £118,335, is consistent with the transfer of £2 million to general reserve. In their report the directors emphasise that good progress has been made with the second stage of the group's major development plan.
To see the take-over terms in their true perspective one has only to glance at the consolidated balance-sheet. Against the proposed take-over price of £13 million, the Dorman Long group shows net assets alone at £14,500,000. It follows that the Government is paying nothing for the group's collieries already vested in the Coal Board, which have an estimated value of at least £2 million, or for the whole of the vast iron and steel plant and the large bridge- building and other engineering interests. As the chairmen of several iron and steel companies have recently—and very belatedly—been at pains to point out, Stock Exchange prices which formed the basis of take-over do not fully reflect asset values or potential earning capacity. In consequence, those firms, such as Dorman Long, which followed a conservative distribution policy and ploughed back earn- ings so as to build up future earning-power, have fared badly visa-vis iron and steel firms who distributed dividends more generously. Quoted around 32s., against the proposed take-over price of 33s. ld., Dorman Long £1 Ordinaries now look reasonably valued. Allowing for a buying commission of 44-d. a share and the transfer stamp, whith amounts to another 70., a buyer is really acquiring Iron and Steel Stock which will be issued as compensation next February at a price very close to par. There would seem to be no special attrac- tion in that.
Guinness Dividend Up It is apparent from the latest results of Arthur Guinness, Son and Company, the Dublin brewers, that sales of bottled beers are hold- ing up against the downward trend much more satisfactorily than draught beer sales. Trading profits for the year to September 30th have risen from £4,667,631 to £4,702,805, with the result that the board has decided to declare a modest increase in the Ordinary dividend. The final payment is 17 per cent., supplemented by a 4 per cent. cash bonus, which raises the total distribution to 32 per cent. For the preceding year a 29 per cent. total was made up as
to 24 per cent. in dividend and 5 per cent. in the form of cash bonus, As is appropriate, the benefits of increased earnings are not confined to the Ordinary stockholders. Staff and employees who had corn. pleted six months' service on November 1st are to get a special bonus of 5 per cent. of annual wage or salary and on top of that £500,000 is being allocated, as a year ago, to the pension fund.
General reserve gets a transfer of £713,000, against nil, while the existing contingencies reserve of £2,437,000 is transferred to genera reserve, raising the latter fund to £7 million. This will be shown in future as a capital reserve in the balance-sheet, so as to make it clear that this amount is employed in the business and is not available for distribution. Following the increased profits and dividend Guinness £1 Ordinary units moved up to 134s. 9d.; but they have now come back sharply to 129s. At this level the yield is nearly 5 per cent. • In my view it is worth while holding the units for recovery.
Shipping Share Outlook
Among the groups which should be well worth watching, on the assumption that markets move from the present phase of acute crisis to the condition of smouldering uncertainty to which investors have now become accustomed, is the shipping share market. In recent weeks prices have been moving up in recognition of the fact that freight-rates, after their fall in the early part of this year, have been showing a substantial recovery. In October the U.K. Chamber of Shipping index of tramp shipping freight-rates rose 6.8 points to 95.8, the highest level reached since May, 1949. Since May of this year the index has advanced from 71.4, and for the first ten months of the current year the average index figure has been 79.4, against 82.3 for the whole ,:f 1949. As may be readily imagined, the Fuel Ministry's urgent demand for ships to import coal from the United States, coming on top of the increasing tonnage requirements brought about by the Korean war, is bound to find reflection in a further rise in tramp freight-rates in the coming months. The investment.' implication must surely be that, even allowing for rising costs, tramp shipping companies are going to make substantial profits. Among my favourites for the long view are the 10s. Ordinaries of Silver Line, now quoted a few pence over par. This company is unlikely to return to the dividend list this year, but having repaid its Preference capital and with up-to-date tonnage at its disposal, should do well in 1951. The shares should therefore prove a good holding for investors who are more interested in capital appreciation than in immediate income
yield. - Reardon Smith
Investors who are attracted by the prospects of the shipping industry but prefer to take an interest in a company already in the dividend list, and with a sound financial record, might do worse than consider the 10s. units of Reardon Smith. This company, with its wholly-owned subsidiary, the Leeds Shipping Company, owns nine oil-fired cargo steamers and twelve cargo motor vessels, includ- ing two motor vessels due for delivery this month or next. Reardon Smith has paid a dividend for each of the past sixteen years and has built up a strong financial position, with cash and gilt-edged securities exceeding £3,170,000. Surplus liquid assets, as shown in the last balance-sheet, amount to over fl per 10s. unit. The accounts for the year to March 31, 1950, showed the effect of the initial depreciation allowances on new ships. To offset the resultant reduc- tion in the tax liability the company transferred £273,000 -to tax equalisation -reserve. On an adjusted basis last year's earnings amounted to over 30 per cent., out of which the company paid a 12+ per cent. dividend. In each of the past two years the company has also distributed a 10 per cent. tax free bonus out of tonnage replacement reserve, which stood at March 31st at £2,211,000. If one takes the yield merely on the 12+ per cent. dividend, it amounts to about 3+ per-cent., with the 10s. units standing at 36s. If, on the other hand, one includes the 10 per cent. tax free bonus, which it seems reasonable to assume will be continued; the return works out at 8+ per cent. Bearing in mind the company's assets position and the prospect of rising freight-rates. the units look good value for money at today's price.
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