FINANCE AND INVESTMENT
By CUSTOS DOMESTIC politics have now reasserted themselves as a temporarily major influence in markets and have imposed the first real check on the post-Budget rise in industrial equity shares. 1 doubt, however, whether this influence can count for much for long. Uncertainty may well result in some slowing down in the tempo of market activity, but there is nothing in the early political pros- pect, as I see it, to suggest the need for any radical re-assessment of investment ideas. On selective lines markets should be able to make further progress given the stimulus of increased profits and dividends.
Pact with Argentina There has been little enthusiasm in the City over the terms of Britain's latest financial agreement with Argentina. Leaving out of account the sharp increase in the meat price, nobody could regard the arrangements over Argentina's sterling hold- ing or the complete lack of arrangements as regards expropriated British-owned utilities as being other than unsatisfactory. The only immediate beneficiaries from the investment standpoint are those companies such as Harrods (Buenos Aires) with heavy accumu- lated arrears of remittances. Shareholders in these concerns can now hope to receive some overdue dividends, but even they have no assurance that remittances will flow smoothly from now on. Again, while the rate of 19.36 pesos to the pound, which covers arrears up to the middle of 1949, is satisfactory, the free market rate now around 40 pesos to the pound, at which subsequent arrears can be remitted, is anything but fair. One point which emerges from the pact is that Argentina is acutely short of sterling. It seems to me that the hopes for fair com- pensation for such companies as Anglo- Argentine Tramways will have to be post- poned at least until Argentina has replenished her sterling resources.
Vickers Surprise On February 9th I stressed in these notes the merits of the £1 Ordinary shares of Vickers, on the strength of the assets position of the group and the dividend prospect. The shares were then standing around 40s. As things have turned out the Vickers board have more than fulfilled recent market esti- mates by doubling the dividend for 1950 at 12} per cent. The shares after touching 54s. 9d. are now quoted around 53s., thus showing a sharp improvement on the quota- tion just before steel vesting day. Last year's net profit at £1,643,644 was slightly higher than the comparable figure for 1949 and group net profit was up from £2,712,193 to £2,838,074. The board have done well to exclude figures relating to the English Steel Corporation and its subsidiaries, now vested in the Iron and Steel Corporation. What is impressive is that, apart from the English Steel interest, earnings easily cover the 121 per cent. dividend, while total net assets have risen from £48,334,094 to just over £50 million. The only qualification which share- holders need to keep in mind in the board's preliminary statement is that supplementary dividends from subsidiaries paid out of undis- tributed profits no longer required formed a source of 2-1 per cent. of the total distri- bution of 12} per cent. That does not seem, however, to imply any threat to the main- tenance of the current rate, which is being paid out of group earnings of about 38 per cent. At their present level Vickers' £1 Ordinaries are now offering a return of just over 4+ per cent. It is tempting to advise taking profits, especially in the case of investors who bought around the £2 mark early this year, For those willing to take a long view, however, the scope for improve- ment seems to me to justify a policy of hold- ing on. Strongly entrenched in the rearma- ment and shipbuilding trades, the group should be able to achieve a further expan- sion in earnings, while a special interest still attaches to the £I5 million of steel compen- sation stock received for Vickers' interest in English Steel Corporation This, as I have previously explained, is equivalent to about 25s. per £I Vickers share. If that amount were repaid to the Ordinary shareholders the shares would quickly rise to a much higher level. In view of the group's large capital expenditure a repayment on a much more modest scale seems likely.
Union-Castle Dividend First the P. & 0. and the Cunard and now Union-Castle Mail Steamship have raised their dividends on cautious lines. The Union-Castle increase from 8 per cent. to 10 per cent. has proved somewhat.disappoint- ing from the market standpoint, in that some of the City optimists had been forecasting a payment of something between 124 per cent. and 15 per cent. Sir Vernon Thomson and his co-directors could easily have ful- filled these estimates if they had so minded, but the increase looks just about right in relation to the 1950 figures. So far from having improved, Union-Castle's net profits for 1950 fell substantially below those of 1949. Group net profit was down from £2,171,012 to £1,578,641, and that compari- son does not afford a full measure of the reduction in gross profits. While deprecia- tion last year was charged at £1,714,117, against 11,431,496, the provision for U.K. taxation was sharply lower at £1,055,046, against £1,826,417. If one adds back these charges trading profits are seen to have fallen by about £800,000, a striking reflection of the steep increase which took place last year in operating costs and which clearly much more than offset an increase in gross earnings. Against that background one is entitled to interpret the decision of a notoriously cautious board of directors to add 2 per cent. to the Ordinary dividend as an expression of their confidence in the long- term outlook. I think one can draw this inference even after making full allowance for the fact that the 10 per cent. dividend is being paid out of available net earnings of over 100 per cent. on the Ordinary stock. Following the profit and dividend statement the £1 Ordinary units fell 4s. to 41s. 9d.— a measure of the disappointment felt by short-term speculators, who had been hoping for at least 4-f per cent. At the present level the yield is nearly 5 per cent. on the divi- dend and about 50 per cent. on earnings. In my iew the shares still represent good value for money as a first-class shipping equity.
Bowater Bonus Plan
There have been few more dynamic equities in the industrial market during the past 12 months than the £1 Ordinaries of the Bowater Paper Corporation. Mounting prices for newsprint have served as a con- stant reminder of the prosperity of the Bowater group in current trading conditions, and now the directors are bringing forward an ingenious bonus plan. Under the scheme the Ordinary capital will be raised to £2,700,000 by the issue of a further 900,000 f 1 shares. Of these, 450,000 are to be allotted to the holders of the 74- per cent. Participa- ting Preference shares. The balance will be allotted to the Ordinary shareholders in the ratio of one new Ordinary for every four shares held. To the Participating Pre- ference holders the plan has obvious attractions. Although participating rights, which in recent years have given holders extra dividends ranging up to 25 per cent., are to be given up, the proposed allocation of one-quarter of an Ordinary share, which today is worth about 17s. 6d. in the market and which will bring in a useful addition to income, is generous compensation. If one looks at the Bowater group's earnings one cannot avoid the conclusion that, even after this bonus issue has been put through, the directors should find -no difficulty in maintaining the current dividend rate of 15 per cent. With the Ordinaries quoted cum bonus around 70s. the ex.-bonus equivalent is about 56s., so that assuming that the 15 per cent. dividend is maintained the yield would be about 51 per cent. Although many who bought Bowater shares when they were recommended here over a year ago around 45s. now have a handsome profit, I see no hurry to sell.
A Well-Covered Dividend The increase in the Distributed Profits Tax has naturally focused a good deal of atten- tion on equity shares whose dividends are covered by a large margin of earnings. Few companies can show a better cover than Barrow Hepburn and Gale, the tanners and manufacturers of leather goods. This com- pany's dividend rate of 25 per cent. was flanked last year by earnings of over 180 per cent. Trading profits jumped from £635,862 to £1,277,587, and after allowing for taxation and depreciation, etc., the amount earned on the Ordinary capital rose from £133,775 to £408,831. Giving f611 recognition to the stock valuation problems created by high prices for leather the directors put £250,000 to stock valuation reserve, which now stands at £400,000, and also allocated £100,000 to general reserve. At the annual meeting the chairman warned shareholders that there must, sooner or later, be increased resistance by the general public to the rising price of leather, but he also expressed his confidence in the strength of the financial position which has been built up. At present the 5s. Ordinary shares are quoted around 22s., giving a yield of just- under 6 per cent. It seems to me that, in relation to the strength of the earnings cover and with the prob- ability of some increase in dividend in the future, the shares have scope for capital appreciation.
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