FINANCE AND INVESTMENT
By CUSTOS MR. CHARLES CLORE, whose bid for control of J. Sears & Co. has been successful, has become a market portent. We shall probably hear more about the economic consequences of Mr. Clore. A discussion about the economic, political and ethical aspects of bids for control has in fact already started. The argument may well generate more heat than light in view of the possibility, which I mentioned two weeks ago, that the directors of many companies may seek to forestall take-over bids by handing out bigger dividends or capital repayments. Some aspects of this development are potentially disturbing—for example, the impetus which it may give to demands for higher wages— but they should not distract attention from the economic case for many bids of this kind. Broadly, this rests on the assumption that if a buyer is willing to pay, say, double the market price of the shares in order to get control, he expects to put the assets of the business to more fruitful use and thus to benefit the community. There has been so little competition and so much distortion in the post-war economy of this country that resources have frequently been put to uneconomic uses, and much waste and inefficiency have been concealed.
" Imps " High Yield Once the bluest of " blue chips," Imperial Tobacco Ordinary stock, can now be bought at about 54s. 3d. to yield 7.4 per cent. on the past year's dividend of 20 per cent. on the present capital. The actual payment is equal to the 32 per cent. paid for four years on the Ordinary capital of £37,563,049 prior to last year's 60 per cent. share bonus. For all practical purposes, therefore, the" bonus" has brought no benefit to stockholders. Group profit, including an unspecified surplus arising from dollar leaf purchases before devaluation, is £3,167,000 lower at £23,092,475, the fall being due almost wholly to the effect on profits of the subsidiaries of a sharp fall in prices of paper and board. Net group profit—after deducting the net surplus on pre-devaluation purchases of leaf tobacco, which is transferred to leaf reserve, as before —is actually £502,000 higher at £9,250,415, mainly because of a drop in tax requirements. Reading between the lines of the preliminary statement, it would seem that tobacco earn- ings proper—i.e., excluding the pre-devalua- tion leaf surplus and paper and board profits —were materially higher than in the pre- vious year. The results confirmed expecta- tions, and there was no immediate change in the price of the Ordinary stock.
Tobacco Industry's Problems To some extent, of course, the price of " Imps " reflects estimates of future earn- ings and dividends, which may not be maintained at last year's level. The diffi- culties facing the industry are certainly formidable. They include exceptionally high duty on tobacco . the heavy taxation of company profits ; the onerous burden of financing stocks ; increasing competition ; the effect on tobacco consumption of the rising cost of living and the publicity given to statistics which seem to show that the incidence of certain diseases is higher among cigarette smokers than among non-smokers. These considerations make it difficult to forecast long-term earnings and dividends ; yet I cannot help feeling that the market may be over-discounting the unfavourable elements in the outlook. Despite all the post-war difficulties, the Imperial group has an impressive record of earnings, and the past year's results should be viewed against a background of reduced profits and dividends shown by many important com- panies. The risk of any further advance in the tobacco duty seems negligible, and there is a possibility that company taxation may be eased a little. All things considered, I think " Imps " deserve a higher investment rating than is indicated by the yield of nearly 71 per cent.
Chain Store Dividend Hopes The recent increase from 421 to 55 per cent. in the F. W. Woolworth dividend, not- withstanding a drop of nearly 7 per cent. in net earnings, has aroused hopes that the directors of Marks and Spencer—whose financial year ends on March 31st, three months later than Woolworths'—will simi- larly open their hearts and their purse strings. Last year's earnings of Marks and Spencer covered the 80 per cent, dividend more than twice, but since then there has been a 100,per cent. share bonus, and the interim dividend has been maintained at 15 per cent. on the doubled. capital. The directors, it is true, said that the doubling of the interim should not be taken as indicating any change in the total distribution ; but the warning does not rule out the possibility of a higher total payment. if the distribution for the year should be only 40 per cent., the yield on the 5s. Ordinary shares at 51s. would be less than 4 per cent., and the price of the shares would fall. On a 50 per cent, dividend the yield would be no more than £4 18s. per cent., but this might be justified if the earnings were good.
Marks and Spencer's earnings have not followed quite the same post-war pattern as Woolworths—probably because sales of clothing and textiles form a high proportion of the turnover. Last year, for example, textiles constituted 75 per cent. of the busi- ness done. In view of the sharp fall in textile prices over the past eighteen months, it will be a remarkable performance if the company is able to maintain its profits ; but Marks and Spencer have many remarkable achieve- ments to their credit. Even if the earnings are no better than for 1951-52, an increase in the dividend would not come as a surprise to the market.
British Home Stores British Home Stores, which operates seventy-five retail stores—compared with Woolworths' 761 and Marks and Spencer's 230—has more than doubled its earnings in the past six years. The results for the year to January 3rd, 1953, show a further rise of £141,000 to £1,267,751 in trading profit, but net profit is £44,000 lower at £394,674 owing to the need to provide £787,500, against £625,000, for tax. The total dividend for the year is 411 per cent., which is substantially better than the 100 per cent. paid for the previous year, for the shareholders in the meantime have been given a 200 per cent. capital bonus. While the dividend came up to expectations, the 10 per cent. decline in net profit was regarded as disappointing, and the ls. Ordinary units fell 6d. to 7s. 6d. At this price they yield £5 1 Is. per cent. on the latest dividend, which is covered more than twice by earnings. Had it not been for E.P.L., which takes £95,000, the net earnings would have been appreciably better than for 1951. The company seems to have plenty of scope for further expansion, and I think the units can still be regarded as a promising " growth " stock.
A Cheap Assets Share Investors who, in the present phase, feel inclined to take an interest in shares which are substantially under-valued in relation to assets might consider the £1 Ordinaries of J. & N. Philips and Company, the old- established Manchester firm of manufactur- ing drapers. Like most other textile con- cerns, this company has been passing through difficult times. Its profits for the year to January 19th, 1953, have fallen from £136,556 to £79,490, but there is still moder- ate cover for the .10 per cent. dividend rate which has been in force since 1948. This rate is being maintained. Nevertheless, the £1 Ordinaries, which last year stood over par and in 1951 were as high as 26s. 6d., have fallen back to 17s. 9d. At this level they are offering the attractive yield of over 11 per cent., and what is much more import- ant to-day's quotation is only a small per- centage of the asset value. The balance- sheet at January 19th, 1953, has not yet been issued but it is unlikely that it will materially alter the picture presented by the figures of the preceding year. Then, net liquid assets, which included cash and gilt- edged stocks, amounting to over £1 million were equivalent to 25s. a share. On top of that there were fixed assets equivalent to another 21s. 6d. a share consisting mainly of land and buildings at a heavily written- down figure. The total asset value behind the £1 Ordinaries, taking book figures, was, therefore, about 46s. 6d. a share. Now that the textile industry appears to have sur- mounted its major troubles, a share of this kind, giving a good income yield and quoted so far below asset values, looks to me well worth putting away.
Aberdare Cables To investors in search of a high return on a good-class equity I commend Aberdare Cables (Holdings) 5s. shares at about 16s. lid. to yield 71 per cent. This is one of Sir George Usher's group of companies. It makes electric-power cables, and its sub- sidiary, South Wales Switchgear, manufac- tures switchgear, power transformers and domestic electrical equipment. There is also a substantial interest in Aberdare Cables Africa, whose earnings on the Ordinary shares have risen uninterruptedly from 2.5 per cent. for 1947-48 to 59 per cent. for 1951-52. The progress of Aberdare Cables (Holdings) has been less spectacular, but the annual dividend has risen from 15 per cent. for 1947-48 to 25 per cent. for 1951-52. The full accounts for the past year have not yet been issued, but I shall be surprised if they do not show that the distribution, as in former years, is well covered by earnings. The immediate prospects for cable manufac- turers in general seem favourable, and the healthy progress of this company in particular is of good augury for the future.
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