FINANCE AND INVESTMENT
By CUSTOS
AFTER a fresh slide markets are beginning to show some resistance. 1 doubt, however, whether one should expect prices to consoli- date on any firm line in these early days of Mr. Butler's programme. All that one can say at this stage is that long-term investors are beginning to examine the current lure of quotations, especially in relation to leading industrial equity shares on which the yield on well-covered dividends is now between 51 and 6 per cent. At tcday's levels the inducement to sell has obviously become much less strong than a month ago. This is a time for laying plans and waiting for opportunities on dull days rather than for a policy of full investment.
Bankers on Inflation If investors need any further warnings of the gravity of the crisis beyond the grim words of the Chancellor of the Exchequer, they will find them in equally grim terms in the annual statements of the bank chairmen. Seldom have the bankers spoken with greater forthrightness than this year, and although the emphasis on different aspects of policy naturally varies from speech to speech there is unanimity on the urgent need to put in hand a vigorous policy not of deflation but certainly of disinflation. Appearing above the name of Lord Linlithgow, who, until his death a fortnight ago, was chairman of the bank, the annual statement issued by the Midland Bank is an indictment of inflation in the most powerful terms. Lord Linlith- gow sets out clearly for all to see four illusions created or fostered by inflation. The illusion of " welfare " springs from the fact that inflation is usually accompanied by over-full employment with rising incomes. What is forgotten is the steep rise in the cost of living and in the level of taxation. The illusion of " security " blinds investors to the loss in value of accumulated savings and to the effects of depreciated purchasing power on the adequacy of all forms of personal provision. Lord Linlithgow also exposes the illusion of " progress " as mirrored in record totals of bank deposits and other measures of business expansion which may merely reflect nothing more than rising levels of prices and costs. Finally, the illusion of " prosperity " is fostered by increased totals of business profits as ordinarily computed, which mask the incid- ence of increased replacement costs. Lord Linlithgow has no difficulty in showing that the time has come to make an assault on rigidity and inflexibility throughout the economic system, but he wisely emphasises that the Government's measures can only succeed if they enlist the full co-operation of all sections of the community.
R.M. Lines Assets Reports—and denials of reports—of take- over deals continue to sway prices of ship- ping shares. As I have emphasised, it is dangerous for the ordinary investor to take a hand in those shares which have been hoisted sharply on the basis of unconfirmed hopes of a purchase bid. If no deal goes through the quotation usually reacts just as quickly as it has previously improved. There is no doubting, however, the pros- perity of the shipping industry, and it seems to me there are opportunities for picking up shares in some of the leading companies on an attractive basis. For the serious investor the £1 units of Royal Mail Lines should prove• gocd value for money at tcday's price of 28s. In each of the past five years this com- pany has paid a 71 per cent. dividend out of earnings which have ranged between 14 per cent. and 231 per cent. A buyer at 28s. therefore gets a return of just over 51 per cent. on a well-covered dividend. This takes no account of the fact that for 1950 the 71- per cent. was supplemented by a 2 per cent. payment from capital profits. This 2 per cent. was paid tax free, and as the capital reserve still stands at £500,000 it seems a reasonable inference that the board may continue this policy. I am net suggest- ing that one is entitled to assume that the tax-free payment-out of capital reset* will be regularly forthcoming, but it is worth pointing out that if one adds in this payment the yield is brought up tea per cent. What is perhaps more impressive is the immense strength of this company's assets. Taking the book value of assets in the 1950 balance- sheet the net asset value of the £1 units works out at 68s. 9d. Surplus liquid assets alone are equal to 35s. a unit. On this basis, therefore, a buyer at 28s. is paying less than the net liquid asset value and, of course, nothing at all for the company's fleet. At one time last year the units were up to 36s., so that there is ample scope for a recovery from today's level.
Saving and Taxation Much the same argument is developed by Lord Balfour of Burleigh, the chairman of Lloyds Bank, who makes the telling point that if only inflation can be halted there need be no more fear of the wages spiral. He also stresses the key importance of a recovery in the volume of savings. Revived savings, he points out, are among the few things which will make possible the reduction in taxation needed to restore incentive and stimulate production. A similar plea for reduced taxation is put in by the Earl of Selborne, chairman of the National Provincial Bank, who calls for a substantial reduction in Government expenditure. " Cuts in expen- diture are never easy to make or popular, but some cuts are essential if taxation is not actually to be increased to meet the increas- ing cost of the rearmament programme ; still heavier cuts must be devised if taxation is to be reduced. And a reduction in the present level of taxation is imperative." In the field of savings a constructive proposal put forward by Lord Aldenham, the West- minster Bank chairman, is that there should be a further increase in the number of tax- free National Savings Certificates which the small investor is allowed to hold. Discussing the effects of the recent change in Bank Rate, the Westminster Bank chairman points out that an important part of the influence of such a move is psychological.
Woolworth Profits Record Nothing seems to halt the record-breaking progress of F. W. Woolworth and Company, the chain stores group. In every year since 1943 this company has succeeded in achiev- . ing an increase in earnings. Last year, in face of rising costs and difficulties on the supply side, net profit, which was arrived-at after charging £1,974,076 more for taxation than in 1950, rose by £841,403 to £6,196,675. It is clear that if. one adds back the tax provision trading results rose by over £2,800,000. Here is fresh evidence, if it were needed, of the efficiency of the Wool- worth management and of the benefits of the policy of expansion which has been steadily pursued for so many years. There can be little doubt that when the full report is issued it will show that a new record turn- over was achieved, the advantages of which have more than offset higher costs. Nobody will have expected an increase in the divi- dend from the 421 per cent. rate established for 1950, and the Woolworth board lives up to its reputation for prudent finance in merely maintaining this rate and putting large sums to reserves. The allocations to development reserve at £500,000 and to general reserve at £750,000 are repeated, and £350,000, against £250,000, is transferred to Pension funds. The carry-forward is up by nearly £870,000 to the impressive figure of £2,367,121. If one makes full allowance for Profits Tax, earnings indicated by the latest figures work out at 64 per cent. on the Ordinary capital, so that the 421 per cent. dividend rate is covered by an ample margin. The 5s. Ordinary units at 41s. 6d. are yield- ing not far short of 51 per cent. Before the recent slide in industrial equities, which has raised the average yield on loading " blue chips " to nearly 5f per cent., one could have said that Woolworth Ordinaries were now decidedly attractive. I still feel that Woolworths should not be sold.
Cable Dividend Surprise In its first two years as an investment trust and financing company Cable and Wireless (Holding) has achieved impressive results. A year ago, in announcing a 6 per cent. dividend on the Ordinary stock, Sir Edward Wilshaw and his colleagues ex- ceeded City expectations. They have now done so again in supplementing the 6 per cent. dividend by a 2 per cent. cash bonus, thus bringing up the total distribution for 1951 to 8 per cent. Profits, before tax, rose last year from £369,000 to £541,000, and after deducting £216,000, against £187,000, for U.K. taxation the net balance was sharply higher at £325,000, against £182,000, a figure which included a net sum of £22,000 in respect of previous years. This is excel- lent progress on the revenue side and it is flanked by a strong showing, in the matter of capital values. The board's preliminary statement discloses that during the year £2,291,632 of the company's Unsecured loan stock was redeemed, reducing the balance outstanding to £3,666,612. This redemption has necessitated realising invest- ments, with the result that the book value of the group's quoted investments shows a reduction from £12,840,118 to £11,202,668. What is distinctly encouraging is the inti- mation that whereas at the end of 1950 the market value of investments exceeded the book figure by just over 2 per cent. the position at the end of 1951 was an excess of nearly 81 per cent. on market values over book values. Following the announcement of these results Cable and Wireless (Holding) Ordinary stock has risen 10 points to 126. Even at this level the return on the 8 per cent. rate is over 61 per cent. The stock still looks good value.
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