FINANCE AND INVESTMENT
By CUSTOS
APART from occasional pauses for a breather, the market has continued to move into new high ground. Since Budget Day the average rise in industrial equities has been about 10 per cent., and prices are now within striking distance of the post-war high point reached in September, 1947. Barring some really serious turn for the worse in the international situation, I expect the market to establish a new peak before the year is out. Profit and dividend increases—many of them quite above all but the most optimistic forecasts—are announced with monotonous regularity and are bound to keep the pot boiling in Throgmorton Street.
Dunlop Rubber Surprise Having recommended the Ordinary shares of the Dunlop Rubber Company a few weeks ago, when they were available at the equiva- lent of about 55s., as " rights" in the market, I am well satisfied with the results
for 1950 announced this week. The rise in the group's operating profit last year was even more spectacular than that of Imperial Chemical Industries. It was from £9,480,850 to £17,620,116, an increase of 87 per cent. In some small degree the improvement was due to the inclusion in last year's figures of the operating profits of the group's subsidiaries in Germany and Japan, but the board emphasise in their statement that the main explanation was the greatly expanded volume of business and, in par- ticular, the success achieved by the overseas interests, which contributed twice the amount to last year's profit as to that of 1949. Taxation has taken its toll of these earnings, the provision under this head covering both U.K. and foreign taxation having risen from £3,458,867 to £8,691,890. The net figure, after tax, was, nevertheless, substantially higher, and fully justifies the board's decision to raise the Ordinary dis- tribution from 15 per cent. to 171 per cent. This dividend, which is payable on a capital which has been substantially enlarged by the recent issue of new shares, has come as an agreeable surprise to the Stock Exchange, the immediate effect being a rise in the £1 units from 62s. to 67s. 6d. I do not think that even at the higher level holders should be tempted to sell. The yield is still over 5 per cent, on a dividend covered by a large margin of earnings. The transfer to general reserve of the parent company is £1,915,000, against £2 million, and the board's policy of ploughing back is further reflected in the retention of £1,259,760, against £301,415, of profits in the various subsidiaries.
Guest, Keen Developments Several points of interest to investors in general, as well as to Ordinary stockholders of Guest, Keen and Nettlefolds, emerge from this company's preliminary statement for 1950. One, and perhaps the most significant revelation, is that the proposed distribution of 5s. as capital repayment on the company's £11,301,307 of Ordinary stock will involve the company in a taxation liability of well over £500,000. This is clear from the hoard's statement that the cost of this dis- tribution to the company will be £3,400,000. ,
whereas the amount the stockholders will receive is approximately £2,825,000. Unfor- tunately, the directors do not explain how this tax liability, which has come as a sur- prise to the Stock Exchange, actually arises. 1 think it may be assumed, however, that the liability represents Profits Tax which, under the law as it now stands, is levied when a company makes a distribution out of a capital surplus of this kind. Apparently, the Inland Revenue view is that, although such a payment is made as capital, it is at least, in part a distribution of past profits and therefore liable to Distributed Profits Tax. This seems to me a harsh view, and I am not surprised that the Taxation Com- mittee of the Federation of British Indus- tries are to press for an amendment to the existing law to be embodied 'in this year's Finance Bill. A liability to tax on such capital surpluses is obviously a serious matter for companies such as Vickers and Cammell Laird who, like Guest, Keen, have seen their iron and steel assets taken over at what are satisfactory prices in relation to balance-sheet values. The problem is also one which affects other undertakings, such as the colliery companies, who, in due course, will be considering making capital distributions out of the proceeds of nationalised assets.
Higher Dividend Rate
In the case of Guest, Keen and Nettle- folds, the £3,400,000 which it is proposed to pay out represents only a modest part of the £18,537,774 of Iron and Steel stock which the company has received as compensation. Stockholders have already been warned by the board of the substantial capital require- ments of the group's development schemes at home and abroad. The directors now disclose that sanction has been given to expenditure of £12 million and they add that the pronounced inflationary tendency must cause an increase on this figure. A further point in the board's statement merits special attention. In explaining why the capital pay-out is being restricted to modest propor- tions, they emphasise that "there are political considerations." This is a clear indication that Guest, Keen are keeping in mind the possibility of the unscrambling of steel nationalisation. It seems to me a fair assumption that companies such as Guest, Keen, Vickers and Cammell Laird would be expected, and would probably be quite will- ing, to reassume ownership of their steel assets if an unscrambling operation were carried through. Meanwhile, Ordinary stock- holders in Guest, Keen have the satisfaction of seeing good profit figures. Consolidated profits of the group were sharply higher last year at £2,720,092, against £2,043,033. These figures excluded the dividends received on investments in the nationalised steel under- takings, which brought in £437,101, against £340,977. As group profit was struck after charging £1,513,741, against £1,384,191, for depreciation and after deducting £2,994,672, against £2,298,071, for taxation, the improve- ment in gross trading profits must have been very marked. Following the increase in the interim dividend from 4 per cent. to 5 per cent., the final payment is raised from 13} per cent. to 9 per cent., bringing up the total distribution to 14 per cent., against 121 per cent. That this welcome increase in the return on the Ordinary capital is fully justi- fied by earnings may be judged from the fact that the transfer to general reserve is maintained at £900,000, while the carry- forward is nearly £100,000 up at £1,841,376.
Babcock and Wilcox Profits The remarkable increase of 40 per cent. in turnover achieved by Babcock and Wilcox, the boiler makers, last year was mainly responsible for the sharp rise in the group's trading profits from £2,156,794 to £4,310,856. On the strength of these figures, the board has justifiably seen fit to increase the total distribution on the Ordinary stock from 15 per cent. to 18 per cent., a decision which is consistent with the transfer of £650,000, against £396,029, to general reserve and with the allocation of £150,000, as a year ago, to reserve for research and development. In his statement Mr. Lionel Fraser explains the increase in bank over- draft from £1,566,907 to £1,945,915 as the consequence df greater productivity and pay- ments made to aid the expansion of various subsidiaries. He regards this position with equanimity, since the overdraft should be self-liquidating over the course of the next few years. It seems a safe inference that the group will not need to raise fresh perma- nent capital in the near future. At 82s. Babcock and Wilcox £1 Ordinary units are yielding just over 41 per cent. Although the future must obviously be judged in relation to the availability of raw materials, the shares still look attractive.
London Asiatic Rubber
With the spotlight focused on the vagaries of American stockpiling policy, suggestions of new anti-inflation measures in Malaya and the long-term outlook for the industry, rubber shares have latterly been a depressed market. There is no doubt that a specula- tive position of some size had been built up in recent months, and it may be all to the good that any weak positions should be shaken out. It seems to me that after the recent fall in quotations there should be scope for discriminating purchases of rubber shares. Among those which now seem to offer good value for money are the 2s. shares of London Asiatic Rubber, a leading com- pany in the Harrisons and Croslield group. This company has just announced a final dividend of 25 per cent. for 1950, which brings up the total distribution to 45 per cent., against 10 per cent. for 1949. Trading profits rose from £260,289 to £1,238,914. Earnings on the Ordinary capital thus rose last year to 84 per cent., which makes the 45 per cent. dividend look reasonably con- servative, especially when account is taken of the fact that last year's average selling price of rubber was only 2s. 9d. a lb. London Asiatic 2s. shares, which have the advantage of enjoying a reasonably free market, are now quoted around 4s. lid., which includes the final dividend, equivalent to about 3d. net per share. The yield on last year's divi- dend is the handsome one of about 23 per cent. This seems to me to make adequate allowance for the risks involved and to leave scope for improvement.
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