FINANCE AND INVESTMENT
By CUSTOS
IF any idea still lingered that investors would allow election victory enthusiasm to outweigh the obvious uncertainties of the immediate outlook it has been effectively dispelled by the performances of markets this week. Under the lead of gilt-edged stocks, which have not yet succeeded in consolidating on any new line, markets have been in full retreat. At the moment of writing gilt-edged are showing some signs of resistance at a level of prices which indicates a 4 per cent. yield for medium-dated stocks. This may well prove to be the new line for the time being. If it does, it will mean that top-class debentures should be priced to yield between 4+ and 4+ per cent. and that one would be justified in expecting 5 per cent. or more on blue-chip industrial ordinary shares. This is the sort of pattern which is already begin- ning to emerge. The adjustment has been painfully quick and with so many uncertain- ties—Bank Rate, E.P.T. and the future of commodity prices to name only a few—I do not see how one can yet assume that the worst is over. My advice remains—to be reasonably liquid and, to those seeking new investments, to keep to first-class equities offering 5 per cent. or more, depressed shares with scope for recovery and to liquidation _ stocks.
Lever Group 'Financing Against this depressing market back- ground the large-scale new financing plans contemplated by British industry seem doomed to a poor reception. In the fixed- interest field the first mistake was the issue of £2 million of Whitbread 4 per cent. Debenture stock at 981-. That was left very largely with the underwriters, and the failure of such a first-class stock to attract investment support created a bad impression. The reason was, of course, that the. price was wrong, having regard to the threatening prospect in the gilt-edged market. Sub- sequent issues have not followed any uni- form pattern. Some companies, such as British Celanese, are relying entirely on new issues of Ordinary shares on " rights " terms at prices well below current market levels. Others, of which the Lever Bros. and Uni- lever group is the most important example, have chosen to raise new money partly through an issue of. Debenture stock and partly through the issue of Ordinary shares as " rights.' The Lever Bros. operation, which aims at raising about £18,500,000 of new resources, is ambitiously conceived in present market conditions. While the issue price of 30s. for the new £1 Ordinaries must be judged most attractive, in that the new shares are being made available on a 9 per cent. dividend yield, the public offer of £14 million of 4 per cent. Debenture Stock, 1960-80, at 96 looks on the dear side in relation to gilt-edged prices. This Debenture is, of course, in the very top class, enjoying the strongest security both as to capital and interest, but the yield of 41- per cent. to the latedt redemption date does not compare favourably with the return which can now be obtained on medium-dated Government stocks. I find it difficult, therefore, to avoid the conclusion that, although some institu- tional and some private investors will like the stock and be willing to put it in their portfolios,- the amount left with the under- writers may be substantial. -- As regards Lever Bros. new £1 Ordinaries, the " rights " are already quoted in the market around 15s. 9d., which means that an investor is able to buy into the new shares at 45s. 9d. with the advantage of avoiding the 2 per cent. Stamp Duty. At 45s. 9d. these £1 shares are now priced to yield well over 6 per cent. on the current dividend rate of 131- per cent. This seems to me a good basis for long-term investment in a first-class industrial equity.
Tube Investments Having received a plain warning in the directors' preliminary statement that the out- look for the steel tube division is causing some concern, Ordinary stockholders in Tube Investments will derive some consola- tion from the strength of the assets position disclosed in the latest accounts. During the year to August 4th assets of the group rose by £9,500,000 to a new record of just over £51 million. Expenditure -on buildings, plant and equipment amounted to £2 million, but, even so, liquid resources, thanks to the £5 million issue of Preference capital, were nearly £5 million higher at just over £9 million at the end of the year. The Tube Investments group, which covers a wide range of engineering activities, con= tinues its steady expansion and, on August 4th, the balance-sheet date, capital commit- ments outstanding were £2,600,000. The snag in the outlook, as the board point out, is the uncertainty regarding steel supplies, and it will not be possible to assess the position and prospect with confidence until particulars of the steel allocation plan are' announced in February. Meantime, the £1 Ordinary units have fallen sharply in the market during the past fortnight and at £5 13/16 they offer just over 4+ per cent. on the 25 per cent. dividend. With-the divi- dend rate covered about six times by earn- ings the shares are Obviously a strong equity, but in view of the low yield the quotation may drift _ down farther in the coming weeks.
Dene Shipping Like other tramp shipping concerns, the Dene Shipping Company reports a sub- stantial improvement in earnings. For the year to July 31st consolidated profits rose- from £149,000 to £257,000, an increase which fully justifies the raising of the divi- dend from 10 per cent. to 15 per cent. Since the end of the financial year this com- pany has- purchased the British Treasury's holding of 380,866 Ordinary 10s. shares in the Silver Line. Shareholders will doubtless wish to know the details of this deal and especially the source of the finance—whether from the sale of tonnage or otherwise—and the purchase price. Mr. Henry Barraclough, the Dene -Shipping chairman, who is also chairman of Silver Line, will doubtless vouchsafe this information at the annual meeting. In the balance-sheet liquid resources appear to be ample for the com- pany's immediate requirements, and in view of the recent strength of freight rates the earnings outlook for the current financial year looks bright. The 10s. shares have moved up by several shillings since I drew attention to their merits some months ago and at 31s. 3d. are now yielding 41 per cent on the current rate of dividend. It seems to me that at this level those who bought the shares lower down might consider taking their profit.
Rootes Motors Results coming from 'the motor manufac- turing industry, although all are good, are not uniformly so. Rootes Motors, who control the Humber, Hillman, Sunbeam- Talbot, Commer and Karrier group, have scored a rather less than average increase in earnings during the year to July 31st Group profits were up from £2,813,000 to £3,474,000, but as taxation has called for £2,070,000, against £1,593,000, net profit is only £184,000 up at £1,404,000. These results must be judged, however, as distinctly satisfactory, in view of the difficult problems, especially as regards materials and export markets, which have faced, and still face, the motor-car trade. Shareholders will be disappointed, in view of-such figures, that the Ordinary dividend is being merely main- tained at 321 per cent., a rate which is covered over seven times by the available net earnings. The £171,000 which the pay. meat of this dividend -involves is in sharp contrast with .the £1,034,000 which is being ploughed back out of profits into the busi. ness. Following the dividend decision the 4s. Ordinary shares have fallen -by is. 9d. to 21s. 3d., at which they-return 6+ per cent They seem to me to be reasonably valued in the light of the uncertain outlook.
A Good Oil Share It is symptomatic of the depressed mood of the market that dividend and profit figures, which a month ago would have stimulated buying, are now- evoking practi- cally no response. A case in point is the sharp rise in earnings and the higher Ordinary dividend just announced by Trinidad Leaseholds. This company reports an increase in its consolidated operating surplus from £2,714,593 to a new peak of £4,730,232. The handling of a record volume of oil at better prices. has much more than offset the adverse effect of higher costs. On the strength of these figures the board have raised the Ordinary dividend cautiously from 14 per cent., tax free, to 161 per cent., tax free, a decision which is consistent with the ploughing back of over £1 million into the business. The 5s. Ordinary units, so far from having moved up in recognition of these results, have fallen from 32s. to 31s. At this price, yielding just over 5 per cent. gross- on a well-covered dividend, they seem to me to offer an attrac- tive investment in a progressive oil concern. This company's interests are by no means confined to Trinidad. Recently a stake has been acquired in the production side of the Alberta oilfields in Canada. Again, in con- junction with the Standard Oil of California group, Trinidad Leaseholds has an ewand- ing marketing outlet in the United Kingdom in Regent, which now includes the former R.O.P. distributing organisation. In short, the shares constitute the equity of an expanding group in an industry whose earn- ings prospects seem reasonably well assured.
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