FINANCE AND INVESTMENT
By CUSTOS
IN face of continuing uncertainties markets are trying hard to find a new line of resist- ance. Although gilt-edged stocks are unlikely to achieve any real stability at this early stage of the battle of the pound, there are indications that industrial equity shares —and some of the commodity share groups —are at last beginning to attract money for long-term investment after their heavy fall. When blue-chip industrials can be bought to yield anything from 6 to 7i per cent. on what appear to be well-covered dividends I think the time has come for the investor willing to ignore temporary fluctuations to make modest purchases. Much the same now applies to base-metal and rubber shares which look well deflated, and which would respond briskly if by ill-chance, the war in Korea started up again on a large scale. This is still a time for caution but no longer, I think, a time for selling.
Dunlop Rubber Prospects Very appropriately, Sir Clive Baillieu took the opportunity at this week's annual meeting of the Dunlop Rubber Company to take up the challenge of those who have been arguing that industrial profits are too high. He reminded them that the ratio of profit to sales, rather than the amount of profit, provides the true measure. In the case of Dunlop the ratio of profit to turnover fell last year from 9.2 per cent. to 6.5 per cent. Even those figures do not tell the complete story, in that they relate to profits before taxation. When tax is deducted last year's profit margin was down to 2.2 per cent. or 51d. on each £1 of sales. Taxation absorbed 66 per cent. of the group's profit in 1951, against 54 per cent. in 1948. Sir Clive added his voice to those of many other company chairmen in emphasising that industry's -resources are now being eroded at a rate which threatens the maintenance of em- ployment and living standards. So far, regrettably, Mr. Butler has added to the burden of industrial taxation. As to the outlook for the current year, the Dunlop chairman's review provides a basis for reasonable confidence. When raw material prices were rising the company did not take full advantage in its scale of selling prices and should reap some benefit from this policy now that raw material costs are fall- ing. On the other hand, the point emerges from the chairman's review that towards the end of last year conditions became more competitive in many sections of the group's widespread activities. It is doubtless the fear that earnings may be affected by falling stock values and keener competition that explains the fall in Dunlop £1 Ordinary units during the past three weeks from just over 50s. to 43s. 3d. On the 171 per cent. dividend, which was very amply covered by last year's earnings, the yield is now just over 8 per cent. • In my view the units can now be regarded as a good long-term investment.
De Beers Criticisms A fall of several shillings in the 10s. Deferred Ordinary shares of De Beers Con- solidated Mines to 60s., following the company's annual meeting, has aroused some comment in the City. In part it douhtless reflects selling by speculators who feel that the peak of diamond sales, if it has not already been reached, is close at hand. At the meeting Sir Ernest Oppen- heimer, the De Beers chairman, recorded his view that this year will again be a pros- perous period for the diamond trade. Sales of £32,856,000 for the first five months com- pare well with the record total of £65 million for the whole of 1951. He added, however, that there were " tangible signs that the excessive boom conditions " were abating. One indication was that the prices in the so-called free market had now fallen to levels closer to the group's own selling prices. But what has disturbed the City most in Sir Ernest Oppenheimer's speech is his inti- mation that he intends to apply some of the group's large surplus liquid resources to financing South African mining develop- ments.
Money for O.F.S.
Although he did not specify the projects he had in mind, there can be little doubt that his intention is to use these resources to augment the funds available for developing the gold mines of the Orange Free State. It is worth recalling that two years ago he gave the first hint of such a further "diversifi- cation "of De Beers' activities and referred to the Orange-Free State as offering" excep- tional opportunities." It is only fair to point out that under Sir Emest's capable direction De Beers Consolidated has become a power- ful concern. Through its interests in De Beers Industrial Corporation it derives a substantial income from sources not con- nected with the diamond trade, and it has also built up a strong liquid position. It seems the greater pity that Sir Ernest should new have decided to supplement the desir- able diversification which has so far taken place by an incursion into the speculative field of O.F.S. gold mining. This seems to me to increase instead of diminish the risks of De Beers shareholders, since, whatever the method of finance adopted, investment in the O.F.S. at this early stage must be speculative. It seems to me that the best use that could be made of De Beers' surplus funds would be either to make some capital repayment to the shareholders or to build up a portfolio of sound industrial Ordinary shares. At 60s. De Beers 10s. Deferred are yielding 161 per cent. on the current divi- dend rate. This seems no more than an adequate return until more is known of the company's investment policy.
Silver Line Recovery Although in the light of last year's sharp improvement in tramp freight rates share- holders in Silver Line had confidently expected a substantial recovery in the com- pany's fortunes, the position now disclosed in the accounts for 1951 has more than fulfilled the most optimistic forecasts. Whereas operations in 1950 yielded only £39,944, last year's operating revenue came out at no less than £875,834. Allowing for £107,717 provided for depreciation and £83,900 for the future surveys of older vessels net profit was £701,942, which com- pared with a net loss in 1950 of £43,005. This spectacular improvement was, of course, made possible by the remunerative level of freight rates, but shareholders are not likely to overlook the all-important fact that the recovery in Silver Line's earning power has been greatly influenced by the energetic management of Mr. Henry Barra- dough since he assumed the chairmanship in 1948. He has not only disencumbered the company of its agreements in unprofit- able trades but re-established its reputation in the shipping world on the basis of a rehabilitation of its finances. Owing to past provision for wear and tear having been higher than earnings last year's profits attracted only a small tax liability, but Mr. Barraclough and his co-directors have wisely dealt cautiously with the available amount. A 10 per cent. dividend on the Ordinary shares takes only £69,160. Apart from £25,000 which- goes into staff funds the remainder of last year's profit goes to reserves. Shareholders also receive, how- ever, another 10 per cent, as a cash distri- bution from capital reserves and this is payable free of income tax. The strength of the financial position is apparent from the balance-sheet,. which shows that cash resources and short-term loans have risen from £769,755 to over £2 million, a sum which seems ample in relation to the corn- ..pany's capital commitments. In judging the outlook one has to take a note of the fact that freight rates have fallen sharply this year from 1951 peak levels, and it must also be borne in mind that this year's earn- ings will attract a much heavier tax liability, including E.P.L. Nor can it be safely assumed that the 10 per cent, tax-free pay- ment will be repeated indefinitely, although there are still ample capital reserves in hand. Against these factors making for caution can be set the company's sound management, strong finances and the stability given by its long-term chartering arrangements for its tanker tonnage. At 19s. 9d. which still includes the dividend just declared, Silver Line 10s. Ordinary shares should not be sold.
B.C.O. Disappointment Among the disappointments in the field of Preference shares quoted under par are the 7 per cent. Non-Cumulative Participat- ing Preference shares of British Controlled Oilfields. A year ago these shares looked promising as a recovery speculation. on the strength of the company's large investment in Trinidad Petroleum Development. Now comes the news in the latest annual report that prolonged negotiations which took place last year with a major offtcompany for the sale of the valuable T.P.D. asset fell through. At that time British Controlled's T.P.D. holding was worth something like £4 million. By December 31st the market value had fallen to £3,156,250 and it is now only about £2,500,000. Against this asset must be set the liability of £800,000 on outstanding 41 per cent. Secured Loan Stock with redemption dates 1952-58. Almost as dis- appointing as the failure to clinch the T.P.D. deal is the disclosure in the report that operations in Venezuela resulted last year in a loss of £121,039. Final tests in the coma pany's deep well programme in Venezuela proved fruitless and the well was abandoned last June—a costly business. B.C.O. are now negotiating for a partnership in regard to their Venezuelan properties or, alter- natively, for an outright sale. In recent months the Preference shares have fallen from around 15s. 9d. to 10s. 6d. Since the T.P.D. asset now appears to be under- valued in relation to its real worth I would recommend holders of B.C.O. Preference to see things through.
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