FINANCE AND INVESTMENT

By CUSTOS

WE have heard a great deal since the war about closed economic systems and closed financial markets and the opportunities they afford for judicious management. We have also had practical experience of the skilful use of these new powers, especially in the gilt-edged market. I doubt, all the same, whether many of the converts to the theory of control were prepared to wit- ness a steadily rising curve of gilt-edged prices in face of such dismal news from the war front as has been our lot in the past ten days. That this has happened can only be explained in terms of the Budget, which has dimmed the counter-attrac- tions of the equity field, and the consequent diversion of the sterling proceeds of the requisitioned dollar securities into gilt- edged stocks. Since in these days there is virtually no selling of gilt-edged, prices respond rapidly to moderate buying.

How far the rise will go it is hard to say, but it is enough to know that only the grimmest turn of political events could bring any serious setback. This is reassuring from the stand- point of the Government's borrowing programme, and nobody will be surprised if the next open market operation is launched before long. It will almost certainly take the form of an issue of short-dated bonds to appeal mainly to the banks and dis- count houses. I estimate the likely amount at anything between £200,000,000 and L300,000,000.

SEARCHING FOR YIELD

When the gilt-edged market has fully consolidated its advance one must expect to see adjusting influences at work in other groups. Right through the Stock Exchange, from well-secured prior charges to the more speculative types of industrial equities, yields will gradually be brought into line. Here is a selection of stocks which I think is worth the attention of investors in search of yields:—

Price.

£ s.

d. Yield p.c.

L.M.S. First Pref. 64 o o 6.2 British Celanese £i Pref. i o 6 6.8 Lancs. Cotton Li Ordinary 18 9 4.3 C.P.R. Lroo Pref. 44 o o 9.0

Henlys 15s. Pref.

to o 11.2

Austin iris. 20 p.c. Preferred

i 4 6 8.2

On this group of half-a-dozen stocks the average return is over 71 per cent., although I must point out that I have assumed, in the case of Canadian Pacific Railway preference, that the full 4 per cent. dividend will be forthcoming for 1940. In the light of the rising trend of traffics this assumption should prove fully justified. The low yield on Lancashire Cotton ordinary is based on the theory that under the proposed limitation of dividends this company, which paid 71 per cent. for the year ended October 31, 1939, and was expected to pay to per cent. for the current financial year, will now be forced down to the minimum 4 per cent. Heie is one of the hard cases which deserves special treatment and may get it. If it does, well and good. The yield will be increased and the shares will respond. If the Chancellor is harsh, the shares are still worth the current price for their lock-up potentialities.

RUBBER SHARE PROSPECTS

Thanks to the high prices prevailing in 1937, one of the Chancellor's three pre-war years, rubber producing companies are reasonably well placed in relation to the new limits on dividends. In the majority of cases the dividends actually paid in 1937 were higher than the current rates so that, given favourable earnings conditions, there is fair scope for higher payments during the war period. So far as can be judged from that position as outlined at recent meetings the prospects for rubber producers this year are fairly bright. I see that Mr. H. J. Welsh, in his address to stockholders of the London Asiatic Rubber and Produce Company this week, took a cautiously hopeful view. He emphasised that this undertaking is in a. sound competitive position. Its planted area is 910

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FINANCE AND INVESTMENT

(Continued from page 670) acres larger than a year ago, 86 acres of old rubber have been replanted and further new planting is in progress. Moreover. of the company's total area of 30,310 acres about 4,000 acre, are budgrafted and half the total is less than 15 years old. Ample provision has been made for amortisation and so far as this year's prospects are concerned, it is worth noticing that the company has made substantial forward sales at good prices. For 1939 the dividend on the 25. units was maintained at to per cent., so that the yield at today's price of 3s. is GI per cent. The maximum rate allowed under the limitation plan is 221 per cent.

Mr. H. E. Miller's 'survey at the meeting of Mendaris (Sumatra) Rubber and Produce was also couched in terms of hopefulness. He pointed out that although "a noticeable reduction" in the exportable percentage allowed under the regulations scheme must be exported in the second half of the year, the company hoped to account for over 2,000,000 lbs., of which, including contracts for forward delivery, 1,o6o,000 lbs. had been sold at a price equivalent to 'old. London landed terms. That is a satisfactory position which should imply a moderate increase in profits. Last year this company raised its dividend from 3 to 4 per cent. and wrote off £7,500 from its mature areas. At los. the £r units yield 8 per cent. The " ceiling " under the dividend limitation proposals is the 5 per cent. rate paid for 1937. If that level is reached the yield at today's price would be raised to Io per cent.

RIO TINTO EARNINGS

With its producing mine in Spain the Rio Tinto Company has managed to earn modest profits in recent years mainly through the income derived from its substantial interests in the Northern Rhodesian copper field. Now, it may be hoped, the outlook is improving, although one must still be cautious in forecasting the political as well as the currency possibilities in Spain. At the moment work at the mine is proceeding normally, but, as Sir Francis Joseph emphasised at the meeting, expenses in terms of pesetas continued to rise, partly because of various measures of social legislation and partly on account of the mounting costs of materials. He gave a categorical denial to reports that the company had made any shipments to Germany last year. Ore shipments, he said, were only 820,000 tons in 1939, against 1,280,000 tons in 1938. This year the company should derive some benefit from higher prices, but it would be unwise to look for any marked recovery in earnings in Spain. Unfortunately, no immediate increase in the incomes from its Rhodesian copper investments seems likely in view of the new dividend limitations. On a longer view, however, these holdings have great possibilities.

MORRIS AND FORD It is apparent from the accounts of both the Morris and the Ford Motor companies that, apart from war, these under- takings were destined for record-breaking figures. Gross profits of Morris Motors rose last year, despite the dislocations of war, from k1,751,181 to £2,385,122 and net profit from £2,357,220 to £1,992,880. Even SO, With characteristic caution, the board has reduced the dividend from 45 to 40 per cent. and applied large sums to various reserves. Ford Motor shows trading profits of £2,728,996, against £1,416,627, and net profit is equivalent to earnings of over II per cent. That amply justified the proposed increase in the ordinary dividend from 5 to 71 per cent., but this has now been amended to 6 per cent. to conform to the Chancellor's proposals. Both companies are now putting their huge resources into the war effort. My guess is that profits will be lower but nevertheless sufficient to ensure a moderate return for the shareholders. Morris 5s. units, at 26s., yield nearly 8 per cent., and at 17s. 6d. Ford LI units offer a return of nearly 7 per cent. I regard these stocks as good value for money with scope for a sub- stantial recovery after the war.