FINANCE AND INVESTMENT

By CUSTOS

Tuts is a makeshift Budget, as it was bound to be. Faced by an inflation gap measured, as I see things, rather optimistically at only £170,000,000 Mr. Gaitskell has had to cast around for extra taxes of that amount. Additional taxation was unavoidable so long as the Chancellor accepted the Government's view that there could be no really major economies on the expenditure side. With existing burdens already at a level which threatens to destroy incentive and to jeopar- dise saving his task was obviously unenvi- able. He has combined economic realism with political sagacity to produce a Budget which can be said to make the best of a bad job.

Onslaught on Profits From the City standpoint Mr. Gaitskell's proposals have the negative merit that they do not include either statutory dividend limitation or a capital gains tax, both of which had been actually canvassed by the City's Fat Boys in recent weeks. But that just about exhausts the credit side. The proposed increase from 30 per cent. to 50 per cent. in the Distributed Profits Tax fulfils the most pessimistic forecasts, and the projected withdrawal of the 40 per cent. initial allowances on new plant comes as a complete and unpleasant surprise. These are heavy blows, the first of which is obviously aimed at that much-abused animal—the equity investor. Despite his protestations the Chancellor is no friend of the holders of risk capital and cannot be absolved from taking a step which can only result in new financing being carried through on loan capital rather than by the much more flexible and desirable method of using new ordinary shares. This is not the way to help industry solve its financing problems.

What of the market prospect ? To judge from the first reactions, good, at least for industrials, the commodity groups, gold shares and overseas securities. So far from falling, these markets have taken Mr. Gait- skell's ostensibly disinflationary Budget in their stride. 1 think second thoughts may be reflected in a less buoyant mood in indus- trials and a more marked swing towards the overseas groups, including South African gold shares. Among the producers Springs Mines at 13s. 3d. and of the developing propositions Stilfontein at 28s. 3d. look good speculative, holdings.

Aluminium Profits Rise

Among the large industrial companies whose Ordinary dividend is covered several times over by net earnings is British Aluminium. This group's heavy programme

of capital expenditure is just beginning to bear fruit, although most of the benefits have still to come in. Last year group trading profits were £551,000 higher at £2,089,000, but heavier charges for depreciation and loan

interest and increased provision for taxation have taken a heavy toll of gross earnings. 'let profit was £56.300 up at £604,900, pro- fiding good cover for the £198,000 required or the 10 per cent. Ordinary dividend. The new Ordinary shares issued last year rank for

only one-half of the final payment of 6 per cent. The outlook is obviously clouded by uncertainties arising out of the rearmament programme, but profits should again benefit from the recent heavy expenditure on expan- sion plans. The £1 Ordinary units are quoted around 43s. to yield just under 41 per cent. They are a sound industrial investment but high enough for the time being.

Thomas Tilling Dividend Stripped of its road transport under- takings, for which it received—and distri- buted to its stockholders—a large block of British Transport stock, Thomas Tilling is making good progress in its new form. Last year profits of the group rose from £750,000 to just over £1 million, the 1949 figure inclu- ding £154,500 gross interest on Transport stock and the 1950 total containing the profits of James A. Jobling from the date of acquisition early in January last year to December 31st. The tax charge is substan- tially higher, but the board has full justifica- tion in the net profit figures for raising the Ordinary dividend by 1 per cent. to 6 per cent. This is consistent with ploughing back substantial sums into the businesses of the various subsidiaries. These include the Corn- hill Insurance Company, Daimler Hire and Stratstone and several engineering and con- structional concerns. James A. Jobling, in which Thomas Tilling acquired a 60 per cent. interest from Pilkington Bros., manufactures Pyrex ovenware. There should still be con- siderable potentialities in the Tilling group and the £1 units at 26s. do not look over- valued on prospects.

Cairn Line Outlook Among the disappointments of the ship- ping share market in recent months have been the 10s. Ordinary shares of the Cairn Line of Steamships. While most shipping equities have moved up these shares have fallen from around 14s. 6d. to 13s. 3d. The explanation is provided in the latest report and accounts covering operations in 1950. Trading profits fell sharply last year from £106,017 to £61,740. They were, neverthe- less, sufficient to allow the company to main- tain the Ordinary dividend at 74 per cent. and to put £30,000 to reserves. What is perhaps a little disappointing, apart from the steep fall in earnings, is the clear indication given in the accounts that Ordinary share- holders must abandon hope of any capital repayment out of this company's substantial liquid resources. The chairman, Sir Ernest Murrant, confirms recent suggestions in the market that the company has contracted to

buy two new ships for delivery early nem

year. From a footnote in the balance-sheet it is clear that the estimated outstanding cost of these new vessels at December 31st, 1950, was £884,500. That Will absorb the whole of the company's surplus liquid assets.

Obviously shareholders must rely on the judgement of their directors as to the relative merits of repaying capital or building fresh tonnage. There can be no doubt that in current conditions fleet expansion must appear an attractive proposition. The chair- man emphasises that, although last year's profits were down, the current year hat opened with very satisfactory trading con- ditions, both eastbound and westbound on the company's routes, and that the whole of the fleet is now trading on a satisfactory basis. At 13s. 3d. the 10s. Ordinaries are yielding nearly 6 per -cent. on the 74 per cent. dividend now in force. I do not think that holders should sell.

Wilmot-Breeden Yield I outlined some weeks ago the investment merits of the Preference shares of Wilmot- Breeden (Holdings), the motor accessory manufacturing business. Holders of these shares have recently been given the oppor- tunity to subscribe for a block of the com- pany's 5s. Ordinary shares—representing one-quarter of the Ordinary capital—at a price of 35s. each. Most Preference holders doubtless availed themselves of this offer and are already in the comfortable position of seeing the shares quoted in the market around 40s. The group's profits, before tax, rose last year from £633,000 to £692,000, but as the comparison was struck after set- ting aside £50,000, against £20,000, for trading contingencies, and £100,000, against £50,000, for fixed assets replacement, the rise in trading profits was obviously quite steep. Net group profit showed a rise of £54,000. to £233,000, which gives an ample cover to the Ordinary dividend of 50per cent. Ranking behind £960,000 of Preference capital the Ordinary capital of £240,000 is highly geared. It thus benefits quickly and appreci• ably from any increase in profits but equally is vulnerable to a relatively small setback. At 40s. the 5s. Ordinaries are yielding 61 per cent. The Preference shareholders who took them up at 35s. should, in my view, run their profit.

A Cheap Trust Stock

Investors on the look-out for shares stand- ing well below par, with prospects of an improvement in capital value, might consider the £1 Ordinary units of the Latin American Investment Trust, which are now quoted

around 12s. 9d. This Trust's name is mis- leading, in the sense that its present holdings in South and Central American stocks form only a small proportion of the total assets. At June 30th, 1950, the last balance-sheet date, South American investments accounted for just under 174 per cent. of the total portfolio, while 81 per cent. was invested in Great Britain and the Empire. The strength of the present position of the £1 units at their present price is that the market quota- tion is very substantially below asset values. In the middle of November, 1950, a valua- tion taken out by the board showed that the London assets alone at £443,000 were worth nearly 18s. on the fl shares. As to income. the dividend in each of the past two :ears has been 3 per cent., so that the yield offered is nearly 5 per cent. During the cu: rent financial year, which ends on June 30th. the Trust will have had the benefit o' the numerous increases in dividend on -.hares included in its portfolio. The prospect, are, therefore, that there will be a moderate increase in the Trust's own payment. The shares are standing well below the best levels touched in recent years. They, were quo° as high as I8s. 3d. in 1947 and stood in 1948 at 15s. 9d.