- FINANCE
HOME RAILWAYS AND THE INVESTOR
WE have now reached the period of the year when expecta- tions of investors in Home Railways- centre upon the interim financial statements to be made by the four trunk railways. It is true that these interim statements and dividends are always dominated by extreme caution on the part of the directors, and it is not until the end of the year that we get a full statement of the financial position of the com- panies, with the results for the entire year. Nevertheless, when, as is the case at the present time, the weekly traffics have shown large increases, there is naturally a disposition to look forward with some hopefulness even to the interim statements, all of which will be forthcoming during the next fortnight.
GOOD REVENUES.
There was never a time, however, when it was more difficult to form an estimate of dividends based on the figures of the weekly traffics. These in themselves, of course, have been most encouraging, the combined receipts of the four companies showing a gain for the first half of the year of nearly £3,550,033. Moreover, the increase reflects favourable conditions both as regards passenger receipts and merchandise. To the total increase just men- tioned, passenger receipts contributed £1,426,003, mer- chandise £904,033 and coal and coke £1,215,003. Once again the London Midland and Scottish Company has achieved the leading place, the receipts showing an aggregate gain of £1,329,033, though the London and North Eastern was nearly as good, the advance being £1,187,033.
IMPORTANT CONSIDERATIONS.
The difficulty of basing any dividend estimates upon the weekly traffic figures, however, is due to two main circum- stances, the one being of a nature favourable to the railway investor and the other being of a less favourable character. On the favourable side there is the prospect of a considerable increase in gross revenues in the times to come if the Railway Tribunal accedes to the request recently made by the railway companies for a 5 per cent. rise in passenger a,nd freight rates. The unfavourable factor lies in the knowledge that, owing to rising costs of materials plus demands from the railway workers for a complete restoration of cuts in wages, the costs of working must be rising greatly. Indeed, in some quarters it is considered that, had the restoration of " cuts " in wages been applicable to the past half-year, that item, together with the increased costs of materials and enlarged expenditure resulting from increased activity, might have swallowed up the whole of the £3,500,000 gain. Thus it will be seen that, encouraging as the gross revenue results for the first half of 1937 may be, dividend prospects are obscure, and I can certainly endorse the caution given by Custos last week, when he was inclined to deprecate the prospects of any great advance in current market quota- tions of Home Railway Ordinary stocks.
SOME MARKET FORECASTS.
At the same time I cannot altogether reconcile myself to the idea that in the case, for example, of the London, Midland and Scottish Railway, the Ordinary dividend on that stock is never to rise above the recent distribution of 11 per cent. Even at that low rate the dividend yield at the present price is about £3 Its. 6d. per cent., and while the estimate which has been formed in a certain quarter, to which I shall refer later, of the possibility of 1938 justifying a distribution of fully 31 per cent. may be over-optimistic, it will be seen that, on the basis of such a dividend, the stock at the present price would give a yield of as much as 10 per cent. This optimistic estimate, however, is based upon the belief that the railway companies will be allowed to raise rates by 5 per cent., and because the quarter responsible for pub- lishing certain estimates based upon that expectation is good— and is doubtless the one to which Custos referred last week— I think that some further details may perhaps be interesting to investors in Home Railway stocks. Although somewhat less optimistic than some previous estimates on which the article which appeared in The Spectator on June 4th was based, they are of a sufficiently encouraging character.
L.M.S . PROSPECTS.
Assuming that permission to raise rates is granted, the increase would not take place until the final three months of the current year and in the case of the London, Midland and Scottish the estimate is put forward that a 5 per cent. increase would mean an addition of £775,003 and, allowing for an automatic growth in the traffic and, at the same time, allowing for additional expenditure of 5o per cent. incurred in carrying the increased traffic and also for the additional cost of coal and materials and of wage restoration and of working condi- tions, it is considered that at the end of 1936 there should be an amount available for the Ordinary dividend of just over 2,000,000 as compared with the actual amount of £4,190,000 represented by last year's Ordinary dividend of 11 per cent., while, as regards the full year's working for 1938, it is con- sidered that the available balance should be sufficiently swollen to make possible a dividend of just over 31 per cent.
THE OTHER COMPANIES.
Following upon the same lines of reasoning, it is considered that in the case of the Great Western there should be an amount available for Ordinary dividend at the end of this year of £1,660,000, as compared with £1,287,891 representing the amount paid in Ordinary dividend for 1936. This increase, it is maintained, should permit a dividend of 34 per cent. on the Ordinary stock, while, for the following year, it is suggested that the available balance should permit a dividend of nearly 5 per cent.
In the case of the Southern, where the amount distributed in Preferred and Deferred dividends was £1,536,000, it is considered that, as regards the present year, the receipts should have increased sufficiently to permit a dividend of about 16s. 6d. on the Deferred and about Li 14s. in the following year. Finally, as regards the London and North Eastern Company, the somewhat optimistic forecast is made of conditions permitting for the current year a dividend of nearly t g per cent. on the Second Preference, with a possible advance to three 6m' eas for the year 4938. As I have already said, these forecasts do not appear to err on the score of pessimism, especially .when it is remembered (Continued on page 126.)
FINANCE :
(Continued from page 124.) that they are based upon additional traffic revenue which almost certainly would involve increased expenditure, but I have given them in some detail because they have been care- fully prepared and also because in some measure they may have been responsible for the rise which has recently taken place, a rise, however, which has been somewhat checked during the past week by uncertainty as to the decision of the Tribunal on the question of rates. If permission were refused, there would almost certainly be a setback in market
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