FINANCE AND INVESTMENT
By CUSTOS IN face of the coming Budget stock markets have held up remark- ably well. The unexpectedly sharp improvement in the gold reserve has given a much-needed stimulus to gilt-edged, and news from the industrial front, although no longer uniformly good, is still satisfactory and a rise in rubber prices has not merely cheered rubber shareholders, but encouraged fresh hopes that during the current quarter the dollar gap will again be closed. Against this background there has been a modest resumption of buying in the stock markets, especially of gilt-edged and some of the leading industrial equity shares, and sellers are naturally inclined to hold off. So far as the Budget is concerned, the revenue-expenditure picture, as it presents itself in the light of the known facts and what seem to be reasonable guesses, does not suggest the proba- bility of major changes. Ordinary expenditure, on the basis of the published estimates for 1950-51, will be £3,450 millions. Revenue, on the basis of existing taxation, allowing for the " growth " factor in the increase in the national income and, on the debit side, for the cost in a full, year of the concessions made last April and some falling off in windfall receipts, should be about £3,850 millions. That would leave an ordinary revenue surplus of £400 millions.
Budget Prospects Net expenditure " below the line," after giving due weight to the coming reduction in war damage payments, may well be around £370 millions. The prospective " overall " surplus, after taking account of " below the line " capital items, would thus come out at approximately £30 millions, or £32 millions less than the actual " overall " surplus for 1949-50. If these figures are within reason- able distances of those which will confront the Chancellor on Tuesday, they indicate that in the present context of disinflation— even mild disinflation—there is little, if any, scope for a reduction in the total tax burden. A little off beer, perhaps some minor concessions on earned income allowances—I doubt whether one is entitled to expect more than that. More pin-pricks for the ordinary shareholder to appease the Socialist left wing ? It is not impossible, but in my ..view it is unlikely.
Cable Scheme Approved • At the second attempt Sir Edward Wilshaw and his co-directors of Cable and Wireless (Holding) have succeeded, by an overwhelm- ing majofity, in obtaining approval for a capital reorganisation scheme. The revised plan; which differs materially from its ill- fated predecessor, is so attractive, with its numerous options to stockholders, that it was hard to see why any opposition should be raised except, perhaps, by holders of the preference capitaL Now that the plan is through, subject to there being sufficient options to exchange into the ordinary stock of the reconstructed company to leave a minimum ordinary capital of £4,955,834, the question arises: What should the stockholders do ? Having recommended Cable ordinary stock at very much lower levels during the past two years, I find some difficulty in giving any advice other than to take the handsome profit. The stock should not be sold immediately at the current level of £281 but holders should opt for the allotment of 3+ year unsecured loan stock which, together with the allocation of Savings Bonds, will enable them to realise in the market for a total of £295 sometime towards the end of June.
At the meeting Sir Edward Wilshaw, to whom the ordinary stockholders owe a heavy debt of gratitude, outlined the prospects of the reorganised investment trust in encouraging terms. Manage- ment expenses are being reduced and the board will follow a generous dividend policy. I still feel, however, that the reorganised ordinary stock will not quite command par in the market when dealings start, so that any present holders who follow my advice by cashing out in June should be able to buy the reorganised equity at a reasonable discount—if that course appeals to them at the time.
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FINANCE AND INVESTMENT—(Continued frau: page 516)
S.M.T. Preference Decision Just too late to influence the fate of the Cable scheme the insurance companies who took a stand on behalf of the Preference stockholders of the Scottish Motor Traction Company have won the day. Sir Andrew Murray, the S.M.T. chairman, now suggests repayment of the 1,000,000 64- per cent. £1 preferences at 25s. each and is asking for ordinary stockholders' approval. I feel that he should and will get the required support—for two reasons. This is a case in which repayment at par is so obviously in conflict with equity that it is by no means certain that recent legal decisions would be upheld if the case were carried to the House of Lords. Second, the cost of the proposed compromise to the ordinary stock- holders is quite moderate. As Sir Andrew points out, unless some compromise is reached, the distribution of the £4 nominal of British Transport stock on each 5s. ordinary unit from the sale of the road interests to the Government may be delayed for at least two years. That is not a pleasant prospect. The S.M.T. compromise may have important repercussions on the rights of preference shareholders in other companies, such as collieries, faced by repayment problems. It should certainly encourage preference holders to stand up for their just rights.
Leopoldina Share-out Stockholders in the Leopoldina Railway have had to wait a long time—through no fault of their directors—for details of the board's proposals for sharing out the proceeds of the sale of the undertaking to the Brazilian Government. Now that the plan has been issued, some holders of the ordinary stock, it seems, are to organise opposition. They appear to be dissatisfied with the price obtained for the assets and to be critical of the board's proposal to bring in the debenture holders for a further participation in any sums which may become available over and above the basic minimum. This opposition seems to me to be woefully wrong-headed. It is a feature of the proposed scheme that holders of the debenture stocks, and especially of the Terminal Company's debentures, are called on to make sacrifices purely in the interests of the junior stockholders. In my view the scheme, if it is to be criticised at all, errs on the side of generosity to the holders of the preference and ordinary stock, whose voting power receives more than its due.
As the railway is now barely earning enough to cover wages, any failure to approve the scheme, resulting in the cancellation of the sale agreement, would clearly be disastrous for stockholders of all classes. Meantime, the uncertainties' surrounding the position, including the fact that the deal has still to be ratified by the Brazilian Congress, are reflected in wide discounts in the market on the pro- posed take-over prices. The 4 per cent. debentures, around £90, look the best value for money for anybody with patience and steady nerves.
King's Motors (Oxford)
Last December I called attention to the merits of the new 2s. ordinary shares issued by King's Motors (Oxford), the car and motor cycle agents and distributors. The market quotation, then 8s. 3d., has now moved up to 9s. in anticipation of the results for the year to March 31 which are expected in June. I still feel these shares are under-valued and have scope for improvement in the light of the company's position and prospects. In each of the past three years, in spite of the handicaps of petrol-rationing and the restricted flow of new cars, the company has made good profits, which have earned an 80 per cent. dividend with a large margin to spare. Now that the ordinary capital has been doubled by the new issue made last December one must be prepared for a reduc- tion in the dividend rate but I shall be surprised if something more than one-half the 80 per cent. previously in force is not forthcoming. An interim of 20 per cent., implying a minimum total of 40 per cent., has already been declared. If 50 per cent. is paid the shares at 9s. will be showing a yield of over 11 per cent.—a generous return on the equity of a company already doing well which stands to benefit substantially from any improvement in the petrol-rationing situation.
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