FINANCE AND INVESTMENT
By CUSTOS WITH the Budget only five weeks off markets ire still putting up a remarkably good per- formance. Now that steel vesting is over some of the steam has gone out of indus- trials, but other groups have taken up the running. Gilt-edged, under the weather a week ago, have begun to recover their ,oise, and investment and speculative .nterest has broadened in commodity, especially rubber, shares and in Katfirs. Clearly, there is plenty of money about, and so far it has not been frightened out of markets by Budget fears. As I said last week, markets as a whole and industrials in particular, will almost certainly quieten down as Budget day approaches, but prices are likely to be powerfully under-pinned by dividend increases, scrip bonuses and the general inflation factor. A swing-over of speculative interest to overseas securities and to gold shares may not be far off.
English Electric Surprise '
It is no longer news for a small company to announce a sharp increase in dividend or for a large company to raise its dividend moderately, but it still comes as a surprise when a leading inoustrial concern puts up its dividend by 50 per cent. This has happened in the case of English Electric Company, which, after holding down its Ordinary dividend to 10 per cent. over a period of 13 years, has decided to pay 15 per cent. for 1950. The reasons behind this decision, which are set out clearly by the English Electric board, seem to me to offer a complete justification. This company has put back very large sums out of profits to extensions and improvements in recent years, and the first-fruits of this past husbanding of resources are now being gathered in.— What could be fairer than that the Ordinary shareholders should now be rewarded, as the suppliers of risk capital, for their con- tribution to the group's current prosperity ? On the Ordinary capital as enlarged by last year's new share issue the extra amount involved in raising the dividend from 10 per cent. to 15 per cent is only about £130,000 net, a small amount in relation to profits, after tax. of £928,566.
A substantial increase in turnover last year was reflected in a jump in trading profits from £2,110,647 to a new peak of £3,233,139. Even allowing for the much heavier charge for taxation, the company has been able to raise the transfer to general reserve from £300,000 to £500,000 and to add £16.000 to the carry-forward, while at the same time increasing the Ordinary dividend. The con- solidated balance-sheet tells its own tale of greatly increased turnover. Stocks and work in progress rose last year by over £4 million to a new peak of £25,380,059. Bank over- drafts were reduced by £1.350,000 to £4,249,025. but this is a small reduction when it is recalled that during the year the com- pany raised over f4 million of new money. It is clear that sooner or. later the group will have to make further calls for perma- nent capital to replace temporary indebted- ness, especially now that the expansion of turnover seems bound to be accelerated by the demands of the rearmament programme. Following the profit and dividend announce- ment, English Electric £1 Ordinary shares, whose merits I have often stressed, have risen 9s. to 61s At this level they are yield- ing just under 5 per cent. on the dividend, but well over 10 per cent. on earnings. Holders need be in no hurry to sell.
Rugby Cement Dividend
Knowing the views of their chairman on dividend limitation. Ordinary shareholders in the Rugby Portland Cement Company will not be in the least surprised at the further increase in the distribution announced for 1950. Having raised the Ordinary payment from 15 per cent. to 173 per cent a year ago, Mr. Halford Reddish, the dynamic head of this growing cement business, now puts the rate up to 20 per cent. This decision is fully justified by the latest results, which show that the trading profit of the group rose last year from £396,393 to a new peak of £464,990. It is apparent that alert management has been successful in matching increased costs by greater efficiency and expanding sales. Net profit subject •to income tax is up from £236,630 to £293,264, and although the income tax provision is £140,000, against £103,000, the higher payment on the Ordi- nary shares is covered by earnings of over 40 per cent. On the 20 per cent. diyidend rate the Ss. shares at 21s. 6d. are yielding only 43 per cent., which is rather less than can be obtained on the equities of other progressive cement concerns. In the case of Rugby Cement, however, the 20 per cent. dividend is supplemented by a 5 per cent. cash payment from capital reserves, which is not subject to income tax. This distribu- tion involves £25,000, which is clearly quite small in relation to the capital reserves of £625,000. Mr. Reddish has pointed out that it is his intention to maintain this tax-free payment as a regular annual distribution. If due allowance is made for this extra pay- ment, the yield works out at well over 7 per cent. In the light of the company's pro- gressive management and the promising out- look for the industry the shares still look good to hold.
Scottish Widows' Investments Investors who are impressed by the attractions of equity shares as a " hedge " against inflation find themselves nowadays in good company. They need only glance at the latest balance-sheet of the Scottish Widows' Fund and Life Assurance Society to see that this old-established institution has been adjusting its investment policy in favour of equity shares on quite a large scale during the past 12 months. Last year Scottish Widows' reduced its holdings of British Government Securities by about £2,250,000, while at the same time increasing its hold- ings of Ordinary stocks by over £4,500,000. What happened was that the whole of the increase in available funds during the year, which amounted to £3,200,000, and about one-half of the proceeds of sales of British Government securities were invested in equity shares to the point that the propor- tion of Ordinary stocks to total assets rose to 30 per cent. This is a very high ratio even for insurance companies which have taken a favourable view of equities and translated it into investment policy. On the income side the effect so far as Scottish Widows' are concerned was to raise the gross rate of interest earned on its funds from £4 17s. 10d. per cent., less tax, to £5 Is. 11d. per cent., the highest rate attained since 1939. On the capital side the result so far has been equally satisfactory, in that the substantial margin between market values and book values which existed at the.end of 1949 was widened still further last year.
London Tin Attractions
In the commodity groups tin shares have recently come to life and have begun to make' some response to the continued buoyancy of the price of the metal at some- thing over £1,400 a ton. While few people will expect tin to command such a price indefinitely, there seems every likelihood that during the rearmament phase this essen- tial commodity will be sold at a price which gives producers a handsome margin of profit. The trouble with most tin shares is that they do not enjoy a free market on the Stock Exchange. There is also the risk in the case of many of the companies that ore reserves are not very large. It seems to me that one of the best methods of acquiring an interest in the prosperity of the tin-mining industry is through the shares of a large holding com- pany, of which an outstanding example is the London Tin Corporation. This com- pany, whose issued capital is £3,618,236 in 4s. shares, has investments in a wide range of tin-mining companies both in Malaya and Nigeria. For the year to April 30th, 1950. during which the price of the metal was far below today's levels, earnings were equiva- lent to just under 27 per cent. on the com- pany's capital, and the dividend was raised from 8 per cent. to 12 per cent. It is clear that for the year ending April 30th, 1951, the company will be able to show substan' tially improved profit figures, and it will lx surprising if the dividend rate is not increased. Quoted around 5s. 6d., the 4s
shares are actually standing below the best level touched in 1946, when the quotatioe was tip to 6s. 6d. •The yield on the 12 per cent. dividend is about 83 per cent., while on the capital side the position is quite
strong. Taking the last balance-sheet at April 30th, 1950, the company held quoted investments with a market value of £2,928,801. If one takes a line through average quotations in the tin share market this figure must'now be something in excess of £4 million. Adding in the company's £2 million odd of cash in gilt-edged stocks and deducting current liabilities, &c., the
asset value behind the shares must now be something close to 7s. It seems to me that these shares have lagged behind in the recent improvement and offer some scope between now and the dividend date.
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