FINANCE AND INVESTMENT
By CUSTOS AN external balance by 1952—at a modestly higher standard of living than we now " enjoy "—this message of Britain's four-year plan under Marshall aid is not calculated to send people rushing towards the stock markets either as buyers or sellers. The. investment moral is plain—that luxury industries' shares should be. avoided except when they are offered on knock-out terms, and the emphasis must remain on shares of the essential companies whose business is closely bound up with capital construction schemes, the export drive and providing the necessities of austere living. Those are broad generali- sations which need to be examined in relation to changing prices and yields—and Government policy—as time goes on, but they afford a rough guide to investment priorities. The facts, as set out in this latest White Paper, are sobering enough, but they provide no ground for fresh alarm and, despondency.
SHELL-V.O.C. DEAL The City has been much occupied during the past week in attempting to judge the fairness of the amalgamation terms offered by the Shell group to shareholders in Venezuelan Oil Concessions. V.O.C. are already closely associated with Shell, who own a sub- stantial investment in the company, through interlocking directorates and trade agreements. The proposal for an outright financial merger is obviously linked with Shell's plans for segregating the Venezuelan assets of the whole group. At first sight the offer of two Li Ordinary units of the Shell Transport and Trading Company for each 13s. 4d. Preference or Ordinary share of V.O.C. looks decidedly generous. From the standpoint of market values it meant, when the deal was announced, that V.O.C. shares standing at Le were being offered the equivalent of nearly £72. It also held out the promise of a substantial increase in income, in that for each 13s. 4d. V.O.C. share paying a dividend of 242 per cent. holders were being offered two Li Shell Ordinary units paying 74- per cent. free of tax.
Why, it may be asked, are some V.O.C. shareholders in some doubt as to whether the offer is worth accepting ? The answer is that although the V.O.C. dividend for 1947 was 244- per cent., available net earnings were approximately 125 per cent., and, further, increased output in 1948 accompanied by high selling prices will almost cer- tainly mean a fresh rise in net profits this year in spite of higher costs. Some holders of V.O.C. shares therefore feel that what are superficially attractive terms offered by Shell do in fact make insufficient allowance for this wide margin of earnings over the current dividend rate.
GROUP EARNINGS SECRET What one needs to know before final judgement can be passed is, of course, the rate of earnings on Shell Transport ordinary capital, so that a true earnings comparison can be made. Unfortunately, the Shell group has not disclosed group earnings figures, although the City has not been left in any doubt that the published profits have greatly understated the real position. Here, it seems to me, is an opportunity for the Shell directors to discard their secretiveness and lift the veil on the earnings figures of the group. It would certainly be unfair to expect`V.O.C. shareholders to exchange a dynamic equity with such a large earning cover for the admittedly broad-based equity which Shell Transport Ordinary units offer without being given something more to go on than is at present available.
At £34 Shell Li Ordinary units offer a yield on the 72 per cent. tax free dividend of 2 per cent. net, or nearly 4 per cent. gross, not a very generous return, but one which would probably be judged more than adequate if the group's profits were known. V.O.C., at £7}, offer an even srAoller current yield, but now carry the pption of exchange into Shell on the terms described. Since I regard Shells as a good long-term investment, the same verdict must be given for V.O.C. I must add that I would make the proposed exchange rather than remain an " outside " shareholder as soon as the Shell directors disclose even an approximate consolidated earnings figure. •
Previous page
