FINANCE AND INVESTMENT
By CUSTOS INvEsroas' second thoughts on the implications of Sir Stafford Cripps's Spartan Budget have brought disappointment to the stock markets. While there has been no panicky rush to sell, there has equally been no sign of any resumption of serious investment buying. In short, the average investor seems to have taken the view that while a continuation of disinflation policy may be justified in the nation's long-term economic interest, it spells no good for the earn- ings prospects of a wide range of industrial companies. Admittedly, the Chancellor of the Exchequer has declared his readiness to reverse engines if at any time disinflation should threaten to develop into a wider deflation, but that is a long-term, not an immediate market factor. For the moment it seems clear that the chances of any material reduction in the total burden of taxation, either on industrial profits or personal incomes, are very slender indeed. This fact, taken together with Sir Stafford Cripps's obvious desire to avoid at this juncture any reflation of purchasing power, makes it impossible to conjure up much hope of an immediate improvement in the earnings and dividends of companies in the consumer goods industries at a time when sellers' markets are giving place to buyers' markets over a wide area. Markets are also beginning to give some weight, as an investment factor, to the possibility of industrial labour trouble in the coming months. If it were not for this risk one would be tempted to emphasise the merits of the ordinary shares of some of the stronger companies in the equipment-making industries, whose relative attractions, vis-d-vis the shares of consumer goods companies, are underlined by the general pattern of the Budget and by the contents of the Economic Survey. It should pay to wait until the prospect is a little clearer.
VALUING SHARE BONUSES
Even the group of shares in companies with substantial reserves and whose directors are known to contemplate the distribution of free capital bonuses have benefited very little from the repeal of the ro per cent. bonus duty. Here, I think, the market has acted wisely in showing great restraint. Even if a company does distribute a scrip bonus that in itself does not add anything to the value of the equity shares. What really matters is current and, still more, prospective earning power and, of course, for the short view the rate of dividend paid. In the past it frequently happened that when a company gave a scrip bonus it did not make a proportionate reduction in the rate of dividend, with the result that these bonus issues came to be regarded as justifying a rise in the price of the shares. I doubt, however, whether one would be entitled to make the same deduction in present conditions in the case of companies which may now take the opportunity to capitalise part of their reserves. For one thing, dividend limitation, although still on a voluntary basis, presents a formidable obstacle to increasing the total distribution to shareholders. So, too, does the clouded industrial prospect. Another point to be kept in mind is that although the bonus duty has been repealed, companies which propose to make bonus issues still have to obtain the permission of the Capital Issues Committee. Where the company's plan is clearly justified on the ground that a distribution of reserves is necessary to improve the capital structure and bring the issued capital into closer relationship with the real resources employed in the business, the required approval of the C.I.C. will doubtless be forthcoming. It will be surprising, however, if the Committee, in giving its approval, does not take the opportunity to remind the company concerned that dividend limitation means that the gross amount distributed to shareholders should not be increased. In other words, any board of directors which used a scrip bonus distribution as a means of by-passing dividend limitation would soon fall foul of the Treasury.
VICKERS' EARNINGS YIELD
The investment moral is that there is no justification for running after bonus shares at rising prices merely on the strength of scrip bonus hopes. Investors should continue to value these shares by reference to their general earnings prospects. Applying this criterion I still regard the los. ordinary shares of Vickers as good value for money at 325. Although the yield on dividend is just under 4 per cent., the earnings yield is over 20 per- cent. and the group's trading outlook is good. This company's balance-sheet is immensely strong, and would fully justify the board in capitalising part of the reserve so as to restore the nominal value of the ros. ordinary shares to Li.
In the report of the annual general meeting of the Scottish Equitable Life Assurance Society which appeared in our advertisement columns on March 18th the effective net rate of interest earned should have been
given as Ils., not 11s. per cent.
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