FINANCE AND INVESTMENT
By CUSTOS AT last the possibility of an early election has begun to cast its shadow across the stock markets. Gilt-edged have fallen sharply, industrial Ordinary shares have staged a modest and cautious recovery and there has been some buying of iron and steel shares. At this early stage it would be foolish to read very much into those tentative movements. The fall in gilt-edged stocks, for example, is probably attributable at least as much to vague talk of higher interest rates-and the obvious inadequacy of new savings-as to the prospect of an early election. How sensitive this section of the market has now become may be judged from the fact that only a moderate volume of selling this week has wiped out the whole of the gains since September 21st. So far as industrial equities are concerned, the rally has been due mainly to re-purchases
by "bears." I do not look for any sustained investment support just yet. The merits of iron and steel shares, still quoted well below the proposed take-over prices, have already been- emphasised here. I still regard these shares as good value whichever way the election goes.
PRESSED STEEL BONUS Investors are by now well aware that scrip bonuses which merely water the Ordinary capital of the company produce very little effect on Stock Exchange prices. It is logical that they should not, since the capitalisation of reserves for the purpose of increasing the Ordinary shareholders' nominal stake in equity really adds nothing to share values. It is altogether different when a scrip bonus takes the form of an allotment of Preference shares. In such instances, the bonus has a real value, in that it is part of a re-capitalisation of the company. The Ordinary shareholder gets an increased stake in the company in the form of Preference shares, which, if he so minded, he can dispose of for cash in the market. Alternatively, if he retains the bonus Preference shares, he stands to receive an addition to his annual dividend income.
The directors of the Pressed Steel Company have announced this week a scrip bonus plan of the kind which investors like. In addition to distributing a too per cent. bonus in Ordinary shares they are allotting 5s. nominal of Second Preference shares to the holder of every 5s. nominal of Ordinary capital. There can be little doubt that when market dealings start in the new Preferences they will command at least their par value, so that, in effect, the Ordinary shareholders are being given a present of 5s. in cash. This explains why the market effect of the bonus plan has been to cause a rise from 29s. to 31s. 3d. in Pressed Steel 5s. units. If one deducts 5s. as the value of the bonus Preference shares, the resultant 26s 3d. looks a reasonable valuation for a share on which a 30 per cent. dividend is being paid out of earnings of well over too per cent.
A LOW-PRICED INDUSTRIAL
As I have often pointed out in recent weeks, opportunities arise in present market conditions of buying shares on attractive terms when a company is in the process of making a new issue of capital. What happens, especially where the issue is a heavy one relative to the company's existing capital, is that the market price is adjusted sharply downwards, so that even allowing for the value of the "rights" the new issue brings about a fall in the market, which is unwarranted by the general trading prospects of the company. A case in point is afforded by Fairbairn Lawson Combe Barbour, the Leeds firm of textile engineers, who are making a new issue of is. Ordinary shares at par to the existing Ordinary shareholders, in the proportion of one new share for every share at present held. Earlier this year, before this financing operation was announced, the is. Ordinaries were quoted in the market as high as 55. 6d. A proportionate adjustment to the new issue terms would have brought them down to around 35. 6d. but they are, in fact, quoted at 25. 6d.
A market has now been started in the new shares around is. 6.1. premium. This means that a buyer pays Is. 6d. and also accepts the liability to put up the is. call, which will bring up the total purchase price to 2s. 6d. No transfer stamp is payable, since the shares are being dealt in in the form of allotment letters. In a circular announcing this financing the directors forecast that in the absence of unforeseen circumstances they should be in a position to recommend a dividend of not less than 25 per cent. on the increas:i Ordinary share capital for the year which ends on March 3t, 1950. On this basis the is. shares at 2s. 6d. are offering the generous return of to per cent.
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