FINANCE AND INVESTMENT By CUSTOS CURRENT international uncertainties remain the
all-embracing explanation of the sub- dued state of the stock markets. But, just as people who dwell near a volcano become adjusted to the risk, so do the markets come to treat an abnormal environment as normal provided it remains more or less the same. The volcano may rumble, but so long as it does not erupt life goes on as usual. Indi- vidual markets, of course, may diverge from the " norm " for special reasons. Gilt- edged, for example, have not yet regained the buoyancy which was interrupted by the riots in Eastern Germany and the release of anti-Communist prisoners by the South Korean troops. Anticipating a continuance of the upward trend, some dealers in the Funds were, no doubtonoderate " bulls " of stock ; and this circumstance, coupled with a paudity of new buyers, would explain the subsequent drift in prices. The approach of June 30th, however, may bring a little window dressing support. Industrial equi- ties, on the other hand, have been relatively firm this week, and some shrewd advisers are recommending switches from undated gilt-edged into good class equities.
Impersonal Savings My own impression is that the substantial declines in profits shown by many companies this year are misleading and that " real " profits are much better than they seem. Profits for 1951 were swollen by rising prices, and " true " economic profits, after allow- ing for the extra cost of replacing fixed assets and raw materials out of taxed earn- ings, were much smaller than the disclosed net earnings. Conversely, in 1952, profits were reduced by falling prices, and stocks of raw, materials were replaced at a lower cost. "'True " economic profits, therefore, were conceivably higher than the disclosed figures. This hypothesis seems to be supported by the fact that many companies, in spite of reduced profits and maintained or even higher dividends, 'find themselves in a stronger financial position than they were a year ago. It is possible, therefore, that impersonal savings, in the form of " true " profits ploughed back, were higher in 1952 than in 1951. Since production has in- creased this year, and the terms of trade are still moving in Britain's favour (which means that a given quantity of exports buys an increasing quantity of imports) the trend of impersonal savings is probably still upwards. The argument may seem academic, but it is, I think, relevant in assessing the future of industrial equities. There is not much equity stock about in the markets, and moderate buying could bring a fair recovery.
Woolworth Interim Raised Although the directors of F.W. Wool- worth say that the increase in the interim dividend from 15 to 20 per cent. is intended to lessen the inequality between the interim ' and final payments and does not neces- sarily imply a higher total distribution for 1953," the possibility of a bigger total pay- ment is not ruled out. Trade this year has probably been better than in the first half of 1952, and Woolworths should have benefited from freer spending, induced by tax relief, and the demand for Coronation decorations. Woolworth's rapid turnover of stock must also be an advantage at a time of downward price adjustments, and the corn- pany should be doing quite nicely this year. On last year's distribution of 55 per cent., the 5s. Ordinary, now around 55s. cum 6d. net dividend, yield 5 per cent. If the total payment should be 60 per cent., which is not an extravagant hope, the yield would be £5 9s. per cent. The units are a sound investment.
Fisons Also Pay More Fisons, the manufacturers of chemicals and fertilisers, are also putting ttp the interim dividend—from 3 to 4 per cent.— apparently without any warning that it does not imply a bigger total payment. In spite of a moderate fall in the equity earnings for the yeir to June 30th, 1952, the total dividend was raised from 9 to 10 per cent. `.` after full consideration of the prospects." Fertiliser prices have been steadier since the decline of last summer, and consumption on the whole has been favourable. The market is expecting good results for the year just ending, and the Ordinary £1 units have had an anticipatory rise to 36s. On a 10 per cent. dividend they yield over 5} per cent., which would be raised to more than 6 pm. cent. if the total payment goes up to 11 per cent. Since all political parties profess their anxiety to maximise home food production, Fisons Ordinary units should be good to hold.
Lancashire Cotton's Bonus Ordinary stockholders of Lancashire Cotton Corporation-have had their dividend appetites whetted by the 5 per cent. Coro- nation bonus which is added to the usual interim dividend of 5 per cent. After this example of liberality it would be an anti- climax if the total distribution for the year were simply maintained at 15 per cent. by a final of 5 per cent., against 10 per cent. There seems, therefore, to be some reason to expect a total payment of at least 20 per cent., which would be covered 4} times on the basis of earnings for the year to October 31st, 1952. The Ordinary units are now around 43s. 6d., which includes just over Is. net dividend. At this price they yield nearly 7 per cent. on a 15 per cent. dividend while the potential yield is 9} per cent. if 20 per cent. is forthcoming. This would be a generous return in view of the immense financial strength shown in the balance sheet and the corporation's impres- sive earnings record. Iikspite of the narrow- ing of cotton spinning profit margins since the 1951 boom, I regard Lancashire Cotton as one of the cheapest textile equities.
. Hawker Siddeley Hopes Yet another leading company, the Hawker Siddeley Group, has raised its interim dividend. This amounts to 6 per cent. against 4} per cent. a year ago. Here again the Ordinary shareholders will be dis- appointed if the final payment is not at least as high as the interim. On this assumption, it looks as if the total distribution for the year to July 31st will be at least 12 per cent. This should still be covered lavishly by earnings, since last year's total payment of 10 per cent. came out of earnings of 86 per cent. Hawker Siddeley is the largest air- craft group in this country, and many of its aircraft and engines are on the super- prioritrlist. On 'an assumed 12 per cent. dividend basis the Ordinary £1 shares, now around 40s. 6d., would yield £5 18s. Od. per cent. From the angle of high earnings and financial strength they are, I think, the most attractive investment in this field.
A Good Property Equity For the second year in succession the London County Freehold & Leasehold Properties has put up its dividend. The total-payment for the year to March 31st, 1953, is per cent., compared with 10 per cent. for the previous year and 9 per cent. for the year before that. Net revenue balance for the past year, before charging profits tax on dividends, is £24,600 higher at £284,861, and the increased dividend is covered comfortably by earnings. The com- pany is one of the largest owners of flats in London, and many of these are subject to rent control. If, as seems probable, legis- lation is introduced to alleviate the hardships of rent restriction, " County Freeholds should benefit. Meanwhile the 10s. OrdinarY units are standing around 19s. 3d. At this price they yield nearly 51 per cent., which seems good enough to be going on with.
Machine Tool Yield Following the recent decision of Arnott & Harrison, the specialist tooling equipment makers, to give a one-for-three scrip bonus to the Ordinary shareholders, an oppor- tunity occur's in the market to buy this coin' pany's 4s. Ordinary shares free of the 2 per cent. transfer stamp duty. The new shares are obtainable around 10s. 3d. which seems to me an attractive price in relation to the strong balance sheet and earnings record. Between 1943 and 1951 this company regularly paid 20 per cent. on its OrdinarY capital and in 1951 distributed a 40 per cent. scrip bonus. On the enlarged capital it paid 25 per cent. out of net earnings of over 10 per cent. for the year to June 30th, 1952. Now the question arises what rate of dividend will be forthcoming on the capital as further increased by the present scrip bonus. I shah be surprised if the 25 per cent. rate is not maintained and earned with a comfortable margin. On this assumption the 4s. shares around 10s. 3d. will be yielding close on 10 per cent., surely a high return on a progres- sive equity of this kind, The shares look well worth putting away both for yield and a moderate improvement in price.
A Railway for Nothing A few weeks ago reports of a take-over by the Chilian Government led to a sharp rise in the £5 shares of the Taltal RailwaY Company from 15s. to 19s. The shares have now come back to 15s., at which level they again look to me a good speculation. The strength of the position is that this company has liquid investments in London worth about 16s. a share so that a buyer at today's price is acquiring a stake in the railway for rather less than nothing. In the balance sheet, the railway stands in the books at over £1 million, or the equivalent of nearly £5 a share. While I am not suggest- ing that in any take-over deal the Chilian authorities will be prepared to pay anything like such a figure, it is reasonable to suppose there would be at least 10s. or so a share to add to the 16s. of liquid assets in London, The railway itself, faced by rising costs, has in recent years operated at a small loss, but the directors have rightly set their face against transferring any of the company's liquid funds from London to Chile. The shares have speculative possibilities and at the present, level do not appear to involve any great risk.
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