FINANCE AND INVESTMENT
By CUSTOS IN face of the bleak provisions of the Finance Bill markets are putting up a brave show. Under the lead of gilt-edged stocks prices appear to have acquired some stability, and if buying is still small and understandably selective, it can at least be said that there is no longer any pressure to sell. To the optimists this welcome steadying of prices marks a real turn for the better." They argue that the post-Budget fall was overdone, and that buying for long-term investment will now gradually exert its effect. They may prove right but I,think they are giving their hopes the 'benefit of many doubts. As I emphasised last week, these are early days to assume that the pound will hold its recent gains in the foreign exchange market and, so far as industrial equities are concerned, the business outlook not only here but in the all-important American market is now obscure. Welcome as the recovery is, therefore, it should not be trusted too far. I doubt whether, at this stage, the investors who, for one reason or another, have latterly been prepared to pick up a little stock will be willing to continue their purchases at advancing levels. Part, at least, of this buying has been on the scale- down principle, i.e. a little now with funds held back for further buying on any appreci- able setback. Examination of the Finance Bill has merely confirmed my view that the proposed Excess Profits Levy is a thoroughly bad tax. It requires drastic amendments which, in the cause of equity and enterprise alike, Mr. Butler should be prepared to accept.
Critics of E.P.L.
The two main criticisms of Excess Profits Levy in the form in which it is at present proposed are that it makes quite inadequate concessions to the hard-hit companies such as the Malayan rubber producers, who had bad standard years, and that it imposes penalties on the go-ahead concerns who have advanced rapidly since the 1947-49 standard period. Already the Rubber Growers' Association has registered a strong protest on behalf of the plantation industry and the chairmen of important public companies have also expressed forth- right views this week. I see that Sir George Bailey, the new chairman of Associated Electrical Industries, has given a provisional figure of E.P.L. liability for this group.- He estimates that if profits in 1952 are the same as in 1951 the Levy will amount to about £350,000. " To that extent," he points out, " there will be less available for ploughing back into the business. If, however, owing to increased efficiency our profits are higher the Levy will be even more severe.... We therefore hope that in the Committee stage of the Finance Bill the Chancellor will be able to avoid sacrificing industrial efficiency on the altar of taxation." At the annual meeting of Hoover, Ltd., which is one of our most progressive industrial concerns, Sir Charles Colston pointed the contrast between Mr. Butler's intentions of prevent- ing people from making large profits out of the unsettled state of the world and the actual effect of E.P.L. on a company such as the Hoover undertaking: Before the war the group's total export turnover amounted to £105,000. Last year the profit actually earned on overseas business reached
£1,715,000. After reviewing the effects of the proposed E.P.L. on current profits Sir Charles asks the question : " Is this the proper reward for our enterprise in tackling difficult overseas markets and launching new products ? " Mr.,Butler should think again. B.A.T. Profits Surprise Profits announced by the British American Tobacco Company, which was originally formed to acquire the export business of Imperial Tobacco, have come as an agreeable surprise to the stockholders. For the year to last September consolidated net profits, after all charges including taxation, were over 50 per cent. higher at £19,987,000, against £13,185,000. If one deducts the Preference dividend, earnings on the Ordin- ary capital work out at well over 80 per cent., out of which the directors are main- taining the dividend at 15 per cent. tax free. Until the full report is available it is difficult to assess the various factors which have contributed to these remarkable results. It would appear that sales in Commonwealth markets increased and that the company may have received a distribution from its American subsidiary. Whatever the causes, it would obviously be optimistic to assume that such profits can be fully maintained, but with the dividend covered by such a handsome margin the outlook for stock- holders appears good. British American Tobacco £1 Ordinary units are now quoted around 88s., yielding about 6* per cent. less tax. I regard them as an excellent industrial holding.
Rugby Cement Expansion Shareholders in Rugby Portland Cement can always rely on a vigorous annual state- ment from their chairman, Mr. Halford Reddish. From the full accounts it appears that group trading profits rose last year from £448,517 to a new record of £522,088. This increase Mr. Reddish shows was due entirely to an expansion of exports. Last year the company sold abroad 28 per cent. more cement than in 1950. The margin of profit per ton in the home market remained low. The report confirms that towards the end of last year Rugby Cement, in co- operation with the Colonial Development Corporation, registered a subsidiary in Trinidad with a capital of £1,600,000. Work on the site has begun and if there are no undue delays in the delivery of plant the works should be in operation by the early months of 1954. Since the issue of the report it has been disclosed from Australia that the company has completed negotia- tions with the West Australian Government for the construction of a new cement plant near Freemantle. The cost will be over £2 million (Australian) and the project will take from two to three years to complete. So far, the full financial implications of this overseas expansion have not become clear, but it is worth noticing that in the latest balance-sheet the current liabilities include a short-term loan of £500,000. Although the cash holding, thanks to the company's policy of ploughing back, is up from £321,530 to £769,296 and there are quoted investments worth another £335,000, I should not be surprised, in the light of the group's substantial capital commitments, to see a funding operation at a not very distant date. With the cement outlook, especially in overseas markets, quite bright Rugby Portland 5s. Ordinaries at 21s. 6d. are an attractive industrial purchase. On the 20 per cent. dividend, which is covered by a large margin, the return is less than 5 per cent. but as I have previously pointed out this is supplemented by a 5 per cent. tax-free distribution made out of capital reserves. If this is considered as a regular feature the yield is brought up to over 7 per cent.
De Beers Pay 200 per cent.
Even after making full allowance for last year's record diamond sales few people had expected that De Beers Consolidated Mines would pay more than 170 per cent. for 1951. In the event Sir Ernest Oppenheimer and his co-directors have seen fit to bring the total up to 200 per cent., against the 110 per cent. paid for 1950. Last year's net profit is reported at £10,338,555, after providing £2,600,000 for taxation at the increased rates announced in the South African Budget. For 1950 the comparable profit figure was £7,880,684, after providing £2,500,000 for taxation. The latest earnings are equivalent to about 235 per cent. on the Deferred capital, so that the higher dividend reflects a generous distribution policy. Following the announcement De Beers 5s. Deferred shares have risen to 71s., but they are still yielding 14 per cent. without allow- ing for Dominion Tax Relief. If allowance is made for D.T.R. the yield to a United Kingdom investor is raised to just over 17 per cent. Such a high return is itself an indication of the risks involved, of which the most important is obviously the possi- bility that a business setback in the United States will affect sales of precious stones. Against that factor must be set the much steadier basis of demand for industrial diamonds, which should derive a sustaining influence from rearmament. All in all, the shares look to me to be fairly valued. They are worth a place in a diversified portfolio.
Retail Trade Surprise There are always exceptions which prove the rule. In the field of retail trade this year's outstanding exception to the general setback is United Drapery Stores. This group, whose interests are well spread throughout the provinces, has succeeded in raising its profits for the year to January 26th from £1,402,288 to £1,894,124. Although the depredations of the Exchequer have increased from £702,131 to £1,098,462 the company is still left with a net profit of £606,484, against £436,651. Results such as these in the difficult conditions which have prevailed are solid evidence of efficient management. For the Ordinary stockholders they bring an increase in dividend from 27* per cent. to 30 per cent., which still represents a cautious distribution of the available net earnings. The transfer to general reserve is up from £100,000 to £275,000 and £35,000, against nil, is set aside for future taxation. On the other hand, and rather surprisingly, nothing is put to stock reserve, which a year ago received transfer of £50,000. United Drapery 5.s. Ordinaries, whose merits I have outlined in the past, are now quoted around 12s. 9d. offering the high return of nearly 12 per cent. They seem to me to be under-valued,
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