FINANCE AND INVESTMENT
By CUSTOS INvEsroas are still waiting on events and are understandably content to do very little. The international political situation, as I see it, is not a dominant factor but merely rein- forces other restraints imposed by develop- ments nearer home. So far as gilt-edged stocks are concerned, it is now clear that something very like a balance of payments " crisis " is looming on the horizon once again. That is not an invitation to buy &W- edged. Leading industrial Ordinary shares, after their recent rise, need some fresh stimulus. The commodity groups are waiting on the Chancellor of the Exchequer's promised statement on price policy. The tendency for quotations, against this back- ground, to move cautiously upward, is signi- ficant. It implies that only fresh adverse developments of a major kind can prevent equities from moving into new high ground in the autumn months.
Inveresk Bonus Implications Readers of these notes will not require any fresh reminder that in itself the distribution of bonus shares does not add anything to the value of the equity of a husiness. Merely to double the number of Ordinary shares by a 100 per cent. scrip, bonus does not add to the earnings yield, which in the last resort is the best single criterion of the proper value of Ordinary shares. It may be asked, there- fore, why the announcement of a bonus plan is usually followed on the Stock Exchange by a rise in quotations. The answer is that, when directors see fit to formulate share bonus proposals so as to bring the issued capital into more realistic relationship with the resources employed, attention is auto- matically drawn to the strength of the com- pany concerned. It is also a fairly safe assumption in the great majority of cases that Ordinary shareholders can look forward to some increase in the total amount distributed. In other words, the dividend will probably not be reduced prdportionately to the pro- posed increase in the Ordinary capital. An interesting illustration is afforded by the case of the Inveresk Paper Company. The direc- tors are proposing to capitalise over £650,000 of reserves and to write up the nominal value of the Ordinary ls. shares to 2s. This step is clearly a rational one, as the corn- panys resources are out of line with the preSent issued Ordinary capital. The impor- tant point for shareholders is the rate of dividend which may be expected on the Ordinary capital when it is doubled by the 100 per cent. scrip bonus. Here, the recent rate of earnings, together with the promising outlook, provide the best guide. The current 20 per cent. Ordinary diviaend rate was covered nearly six times over by the profits disclosed in the last report, and there is every reason to believe that earnings during the current financial year will show a further expansion. The optimists are, therefore, suggesting that the directors may feel justified in maintaining the 20 per cent, dividend rate on the doubled capital. This argument is strongly buttressed by the fact that the 20 per cent. dividend represents a return of only just over 3 per cent. on the capital and reserves attributable to the Ordinary share- holders. On top of this the Inveresk group is only now beginning to enjoy the full bene- fits of the improvements and economies arising out of heavy capital expenditure pro- grammes carried through •in recent years. The only snag, as I see it, is that the group still has outstanding fairly heavy commit- ments in the field of expenditure, most of which have to be met during the current financial year which ends in September. Fortunately, the group is well provided with liquid resources, but even allowing for that' one must assume that the board will continue to pursue a cautious dividend policy. The Is. Ordinary shares are now quoted around 5s., yielding 4 per cent. on the present divi- dend. If, on the doubled capital, 15 per cent. should be forthcoming, which looks to me a reasonably cautious estimate of the proba- bilities, a buyer at today's price could look forward to a 6 per cent. return. The shares look to me to be well worth holding.
Hulton Press Plan Shareholders in Hulton Press, the maga- zine publishers, who have seen their holdings fall from 31s-, the price at which the offer ' for sale took place in 1948, to 19s. will wel- come the ingenious proposals to help the dividend position now put forward by Mr. Edward Hulton, the chairman and managing director. To check the drain on the com- pany's liquid &sources and so help to safe- guard the present rate of 75 per cent. on the Ordinary shares Mr. Hulton is proposing that 750,000 of his holding of 1,071,728 Ordinary 2s. 6d. shares be converted into Deferred shares, whose dividend would be limited to 5 per cent. and which will not be quoted on the Stock Exchange. It is easy to see that as a result of this plan the gross dividend payments made to Mr. Hulton will be very materially reduced, although since the whole of the forfeited income is subject to the top rate of tax Mr. Hulton's net loss will be relatively small. What matters from the company's standpoint is thata saving will be effected which, in relation to the current rate of profits, will be well worth while. I cannot imagine any of the shareholders standing in Mr. Hulton's way in carrying through this plan but some of them may feel that his proposals would have been more effective if he had seen fit to give a reason- ably long-term undertaking. In its present. form the plan allows Mr. Hulton to recon- vert at any time on his giving notice. This probably explains why the market reaction to the plan has been relatively trifling, in that the 2s. 6d. shares have moved up only a few pence to 19s. At this level they are still offering the high yield of close on 10 per cent. Although the group has progressive management it is engaged in one of the most competitive sections of the publishing trade. The shares can, therefore; only be regarded as a. speculative holding.
United Dominions Trust Despite Mr. Douglas Jay's recent warn- ing the list of dividend-raising companies has lengthened quite appreciably. It is now concern which has increased its profits and has a large margin in hand over previous dividend rates fails to pass on some small -part of its prosperity to the Ordinary share- holders. This, in my view, is as it should be. Otherwise, why put up risk capital for industry ? Among the latest batch of divi- dend raisers is that 'progressive finance institution, the -United Dominions Trust, headed by Mr. J. Gibson Jarvie. For the year to June 30th this company announces a final dividend of 10 per cent. supplemented by a 29 per cent. cash bonus which, with the 79. per cent. interim, brings up the total dis- tribution to 20 per cent4 against 15 per cent.
in the preceding year. Mr. Gibson Jarvie explains that the company is returning to the pre-war rate of 179 per cent. and is giving - the 29 per cent. cash bonus as a token against the dividends which , were unpaid during some of the war years. Group profit at £634,671, against. £526,428, has reached a new record despite the fact that not all the financially sound propositions offered were accepted. The net figure, after tax and Debenture interest, is up from £225,550 to £235,519, which shows that the higher divi- dend is covered about twice over. The ques- tion of raising additional capital is still under discussion and further information is promised to the shareholders at the annual meeting on August 15th. It will be interest- ing to see whether the Trust, part of whose business is to provide hire-purchase finance, will secure Treasury consent for its capital- raising proposals. I should not expect that there will be any great difficulty, seeing that the finance which the Trust puts up plays a constructive part in productive enterprise. United Dominions Trust £1 Ordinary shares are now quoted around 75s., yielding just over 5 per cent. They are a sound and pro- gressive holding.
_Lewis Berger Dividend Among the larger industrial concerns announcing a higher payment this week is Lewis Berger, the paint makers. For 1950-51 the dividend is made up to 229 per cent. on an Ordinary capital which has been doubled by a 100 per cent. scrip bonus. The effective increase on a strictly comparable basis is 169 per cent. Profits, after deprecia- tion but before tax, have risen from £729,382 to £810,054, a trifling testimony to what can be achieved by alert management in face of raw material difficulties. After allowing for a much heavier tax charge, however, the group's net profit is slightly down at £412,000, against £453,000, but even so the current dividend rate is covered nearly three times by available net earnings. In his state- ment Mr. Thomas Lilley, the chairman, tells shareholders that results for the early months of this year have indicated that in 1951-52 this group will again defy restricting in- fluences. He also suggests that the present dividend may still not be commensurate with the confidence and patience which share- holders have exercised. Lewis Berger 4s. Ordinary shares are now quoted around 20s. 6d., at which they give a return of 49 per cent. It may well be asked whether such a yield is adequate on the equity of a com- pany engaged in a highly competitive in- dustry. The answer seems to me to be that on a short view the shares must be judged fully valued.
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