23 DECEMBER 1972, Page 34

Account gamble

An attractive punt

John Bull

At the end of every year with almost clockwork regularity financial columnists of most newspapers make their nap selections for the coming twelve months. Perhaps one of the most regularly featured situations in this context is the Deferred stock of Tobacco Securities Trust. D. Zoeti & Bevan recently commented that the Deferred are logically, historically and statistically cheap relative to the OrdinarY. They have since moved ahead but in mY view the broker's argument still holds good. Traditionally in fact the Deferred have enjoyed a lower yield on account of the gearing effect. And with the results soon due the Deferred should harden at the expense. of the Ordinary before going ex dividend in January.

Tobacco Securities is in effect an investment trust with much of it5 investment in BAT's minorities. About Elv per cent of its income comes frail overseas and naturally over the past year currency realignments will have had a mixed effect on results for the year to October 30.

Returning to the subject of the relationship between the Ordinary and the Deferred shares, the former is entitled t° a non-cumulative dividend of 15 per cent and thereafter amounts distributed are, divided equally between the two classes oi shares. Thus the income received by the holder of an Ordinary share is equivalent to 3.75p + 7/32 of the income received bY the holder of a Deferred share. So realtY, we should value the shares on the basis 01 dividend.

This is the sum I have done to arrive at a theoretical price for the Deferred, with the Ordinary currently standing at 18,0P and the Deferred 565p, and the kJ Preference yield 10.5 per cent: Value 33.75p =-fa x loo = 35.7p. TST Ordinary less 35.7p = 144.3p. Theoretical TST Deferred (144.3 x 4?-) 660p.

I believe that we shall not see such ! wide discrepancy between the actual and the theoretical prices for very long. NoVh, as I said earlier, the chances 0: appreciation are all the greater ahead 0' going ex dividend in January. Making tili5 a particularly attractive short-term punt.