FINANCE AND INVESTMENT
By CUSTOS IT was quite like old times for the Bank to announce a change in Bank rate without warning, that is, after the usual Thursday meeting of the Court. The sharpness of the rise which followed in the gilt-edged market reflected the unexpectedness of the decision to bring the rate down from 4 per cent. to 31 per cent. For example, 31 per cent. War Loan, the leader of the undated stocks, jumped two points before the close on Thursday of last week and another point on Friday. By Wednesday this week it had eased slightly but at 861 it was 31 points higher than it was a week ago and the yield is £4 Is. 10d. per cent. against £4 4s. I ld. per cent. Thus, the Chancellor has cheap- ened the long-term rate of interest so far by 3s. per cent. I would be surprised if he was content with that. He probably expected at least—and got—a is per cent. actual fall in the Treasury bill short-term rate—from 21 per cent. to 21 per cent. But he probably hopes to encourage industrial investment by cheapening the cost of long-term borrowing for the credit-worthy companies by much more than I per cent. I dismiss as unworthy the suggestion that he was influenced by any desire to favour the coming steel issues. The fact that British industry has been tending to repay bank indebtedness rather than borrow more to increase productivity may have warned the Chancellor that dear money can be carried too far. At any rate he is merely following the lead of other European Governments which, since the set-back in production in 1952, have cheapened money rates in order to give a boost to production. The fact that he has chosen this moment to cheapen money here implies, of course, that he is confident that he can maintain external as well as internal equilibrium. In other .words, he cannot be afraid of any balance of payments crisis for some time to come. In holding this view he has no doubt been reassured by the continuing favourable terms of trade and by the recovery in wool which has enabled Australia to relax import restrictions and take more of our goods. For all these reasons, which should bring renewed confidence to the market, I am persuaded that there is eventually another point or two advance to come in the gilt-edged market. I see nothing—short of a worsening in the international situation after the profit-taking which is to come— to stop 31 per cent. War Loan rising to yield 4 per cent. or even a shade under.
The Blessings of 3i per cent. Bank rate Apart from these broad national objec- tives, which are wholly admirable, the Chan- cellor no doubt had technical considerations in mind when he agreed to the lowering of Bank rate. These are not without import- ance: It will be appreciated that although he has cheapened money he has not relaxed his control, as far as it goes, over the volume and direction of bankers' credit. His directives to the joint stock banks not to increase advances except for specified pur- poses remain in full force. But it is difficult to control bankers' advances effec- tively, when you do not own the banks, if the banks have too plentiful a supply of money. And the heavy Government borrow- in4 from the banks this year has tended to increase the supply of bank cash and the total of bank deposits. The Chancellor must therefore be anxious to carry through a further funding of Treasury bills in order to reduce the banks' high " liquidity ratios " and so reinforce his control over the credit situation. The lowering of Bank rate will enable this funding operation to be undertaken at less cost to the Exchequer. The same consideration applies to the con- version of £577 millions of Serial Funding Bonds due in November and the £413 millions of 2/ per cent. National War Bonds callable on March 1st, 1954. Alto- gether dear money has been adding many millions to budget expenditures and if the Chancellor can now cheapen the cost of the floating debt by, say, £12 millions a year and at the same time tighten his control over the supply of bank credit, it is a technical advantage well worth having.
Outlook fig Equities This line of argument is, of course, helpful to industrial shares as well as to Govern- ment stocks and it may be significant that on Monday the Financial Times index of ordinary shares momentarily broke through its previous peak (the 1953 " double top " to use chartists' language). However, there was no follow-through and by the middle of the week the market had come back slightly and was looking tired. Even Great Universal Stores reacted, for Mr. Isaac Wolfson did not announce another bonus at Tuesday's meeting and left the " bulls " unhappily stranded. A great debate is now raging on the future course of British equities. The optimists point to the fact that 1953 trading is distinctly better than that of 1952, that companies are pursuing a more liberal dividend policy in View of the coming abolition of the excess profits levy and that current dividend yields are still high in relation to the gilt-edged rate which Mr. Butler is lowering. This last point was reinforced by the publication of the Actu- aries' new investment index which at the end of August gave the average yield on industrial shares (all classes) as 6.08 per cent. The pessimists, however, reply that there are other considerations to bear in mind, for example, the prospect of some recession in the United States and the likelihood of higher wages being won by the unions. There is much force in both arguments and until the outlook becomes clearer I would counsel investment caution. However, when equi- ties can be found which are not intrinsically speculativd and return a yield which is 2 per cent. or more above the " riskless " long-term rate of 4 per cent., I would not oppose buying. I give two possible examples.
Wellman, Smith Owen The first is Wellman, Smith Owen Engin- eering, which build furnaces, construct steel making plants and other heavy capital equipment. As only 29 per cent. of its order book is for export it is not so vulnerable to an American recession as some others in this industry. Of course, it would suffer if Amalgamated Engineering Union succeeded in winning its claim for a 15 per cent. rise in wages, but it is such an efficient, well- managed company that it can be relied upon to meet and overcome the ordinary risks of its trade. In the year to March 31st, 1953, it earned 76 per cent. and paid 171 per cent., which reveals its conservative finance. At the present price of around 60s. 9d. the shares therefore return an earnings yield of over 25 per cent. and a dividend yield of over 5/ per cent. It is just distributing a bonus out of its ample reserves to the extent of one £1 ordinary share for every £12 of stock held. Next' Monday the shares will be marked " ex rights " at about 56s. if the present price of 60s. 9d. holds. If the company paid the same dividend on the increased capital which would not be difficult, the shares would then return a yield equivalent to 61 per cent. With no debentures and no preference shares in front these ordinary shares are a low- geared and well protected equity whose high yield is made the more attractive by Mr. Butler's lowering of the rate of interest.
British Plaster Board
Another high-yielding share—on divi- dends but not on earnings—is,British Plaster Board which caters for the Government- favoured housing drive. At 15s. these 5s. shares return 6.6. per cent. on the present dividend of 20 per cent. and only 12 per cent. on earnings of 37 per cent. reported for the year to March 31st, 1953. At first sight this would not suggest conservative finance but the company maintains a very strong cash position which justifies it in paying out a generous proportion of its earnings. For example, at the end of March its surplus of liquid assets over current liabilities was nearly £3 millions (£1,828,000 being in cash) which exactly matched its issued capital. Next year, when the excess profits levy is abolished, it may well increase its distribu- tion, though no increase is expected in the interim dividend due to be declared in November. Five months ago the company took over another firm of paper and board manufacturers but apart from this I would expect its turnover to increase as builders come to realise that house building can be cheapened by the more liberal use of plaster boarding for interior walls. It may be observed that a combined investment in Wellman, Smith Owen and British Plaster Board would return 6.8 per cent. A " risk premium of 2.8 per cent. over the 4 per cent. " riskless " rate is not unattractive.
Vitamins, Ltd.
The small investor who needs a yield vitamin in his financial food might have a look at Vitamins, Ltd. This company, which has recently gone into a new. factory at the new town of Crawley, manufactures about forty different products, including Bemax vitamin food, " Vitamealo " for cattle, pigs and poultry and " Equivite for horses. I cannot speak for the animals but Bemax is forging' ahead and I am told that the company is getting a contract for putting vitamins in our new national loaf. For the year to March, 1953, it paid 20 per cent. and earned 29 per cent. Its turnover has nearly doubled in the last two years. It has just issued one new share for every three at Is. 9d. (bringing the issued capital up to £207,466) and the directors state that it should be possible to maintain the 20 per cent. dividend on the increased capital. At the middle price of 2s. 1 Id. these 1s. shares yield about 9 per cent. The company needs to build up its own financial strength. When it does so its shares will not return so high a yield.
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