FINANCE AND INVESTMENT
By CUSTOS
UNDER the lead of gilt-edged, markets are continuing their slow and cautious recovery. Buying by financial institutions, principally the insurance companies, has found dealers acutely short of stock and prices have been correspondingly responsive. When so much depends on the business prospect in America, to say nothing of the known requirements of industrial borrowers at home, I find it hard to believe that the upward movement, welcome as it is, can go much further at this stage. While the prospect may justify picking up individual securities which have been severely depressed, it does not appear to me to be good enough to warrant a policy of being fully invested.
Sound Prefence Shares Side by side with the recovery in gilt- edged stocks a better tendency has developed in other fixed-interest securities, notably in preference shares which had suffered severely during the gilt-edged fall. For those inves- tors to whom the 41 to 41 per cent. yields obtainable on a number of Government stocks are still on the low side there are many sound preference shares now priced to return anything between 5 and 51 per cent. Here is a short selection :- Amalgamated Metal s. d.
s. d.
6 per cent. 21 3 5 13 0 Metal Industries 31 per cent. 14 9 5 1 9 Morris Motors 71 per cent. 27 9 5 15 0 Morgan Crucible 5 per cent. 18 9 5 6 9 With its subsidiaries Amalgamated Metal Corporation is the leading group of metal and rubber merchants in this country. The 6 per cent, preference dividend is the first charge on profits and has never been covered less than four times in any year since 1934. At the end of 1950 net liquid assets alone were equal to five times the preference capital. Under the terms of the proposed merger with the Austin company holders of Morris Motors 74 per cent. preferences will exchange into the 5 per cent. preferences of the new holding company— British Motor Corporation. The exchange terms are 160 B.M.C. 5 per cents. for every 100 Morris 74 per cents., or the equivalent of acquiring the B.M.C. 5's at 17s. 41d. The yield of £5 15s. is calculated on this basis. Latest combined profits of Morris and Austin cover B.M.C. 5 per cent. prefer- ence dividend nineteen times. Morgan Crucible manufactures crucibles and other refractory products for the electrical engin- eering and chemical industries. It has no debentures and the latest profits show the preference dividend covered over eight times. The cover has never been less than two-and- a-half times in any year since the company was formed in 1934.
Rubber and the Levy The reaction in Mincing Lane to Mr. Butler's hints of concessions in the field of Excess Profits Levy has been one of very modified rapture. To the great majority of rubber producers the Chancellor's only proper course appears to be to grant the plantation industry complete exemption— or failing that, to introduce such sweeping concessions as would reduce the impact of the Levy to insignificant proportions.. The case for the industry has been argued with great cogency in the annual statement of Sir John Hay to shareholders of United Sua Betong. He points out that the standard E.P.L. years of 1947-49 were a period when " the industry had scarcely emerged from the rehabilitation stage after a disastrous three-and-a-half years of enemy occupation, whilst the price of rubber was still under the influence of a blundering decision by the Government of the day by which, at a time of shortage, the price was fixed below the cost of production." As for Mr. Butler's suggested alternative standard, which still relates profits to nominal capital, Sir John emphasises that in the case of United Sua Belong the nominal capital is only £900,000 while the real capital employed is nearly £3,000,000. For 1951 United Sua has paid a dividend of 50 per cent. out of substantially higher earnings, but the outlook for 1952 is less favourable. Costs have risen but the average price of rubber is likely to show a fairly sharp decline. Even on a lower profit, however, the E.P.L. liability threatens to be far from negligible unless worth-while con- cessions come along. At 47s. 9d. the £1 dinary units are priced to yield 21 per cent, on last year's dividend. They should be worth holding for a moderate recovery.
Textile Machinery Results It was scarcely to be expected that Textile Machinery Makers, the Lancashire engineer- ing combine, would succeed last year in maintaining its earnings at the peak level reached in 1950. Nevertheless, the fall in trading profits from £3,329,149 to £2,449,190 now reported is steeper than most people expected. Foreign competition, especially from Germany, became much keener and a sharp rise in costs reduced profit margins until later in the year, when selling prices were increased. Thanks to the large cover behind the dividend in the previous year the directors have had no difficulty in main- taining the 10 per cent, rate, which for 1951 is paid out of available net earnings of just over 50 per cent. About £770,000, against £1,168,955, is being retained out of the year's profits in the business. So far as this year's prospects are concerned, the chairman is moderately encouraging. The company has sufficient orders on its books to keep the works fully -employed in 1952 and, although deliveries to the home market may fall short of the high level of 1951, there will be some new work from the rearmament programme. The only direct investment interest of the public in T.M.M. is through the 5 per cent. £1 preference shares, which give the attractive return of 5/ per cent. at 17s. 3d.
David Whitehead Yield Having called the attention of investors in happier days for the cotton trade to the merits of the is. ordinary shares of David Whitehead, the the vertically-organised Lancashire textile combine, I am well satisfied with this company's 1951 results. Trading profits have risen from £674,303 to a new record of £760,102 and although net profit is slightly down at £273,031 owing to a much heavier provision for taxation, it still covers the 374 per cent, dividend well over three times. Since this company was made public in 1947 it has shown itself a progressive unit in the textile industry. Its profits have steadily expanded and the pursuit of a cautious dividend policy has enabled the board to plough back the impressive sum of about £700,000 to reserves. Why, then, are the Is. shares, quoted not so very long ago around 5s., now standing as low as 2s. 101d. ? The answer is the uncertainty of the outlook, especially with stocks figuring in the latest balance-sheet at £1,307,177, a rise of over £500,000 since the end of 1950. In his annual statement the chairman, Mr. J. C. Whittaker, admits that this substantial increase in stocks was due mainly to a slower rate of delivery towards the end of last year but he says that since December 31st " the movement of goods to the group's chief customers has started to flow again and the cash position is expected to improve unless some unforeseen and unfavourable circum- stances arise." At the end of the year the cash balance was still reasonably satisfactory but there were considerable outstanding capital commitments, including that for a new factory in Southern Rhodesia. As for the earnings outlook, Mr. Whittaker refers to the serious blow of the Australian imports cuts but points out that most of the orders in hand for that market have been diverted. In spite of the greater difficulty of getting new orders the group's export trade as a whole is described as fairly steady. At 2s. 101d., David Whitehead Is. ordinaries are now yielding 13 per cent. on a well-covered dividend. After making full allowance for the obscurities of the trading prospect, I think they are under- valued at tcday 's price.
An Asbestos Share Even in these days of dull markets it will pay to look out for " growth " companies. While the market, in its present mood, may be unwilling to capitalise potentialities far ahead, the investor prepared to take long views is, by the same token, given oppor- tunities which otherwise might not have come his way. Among the " growth " shares whose merits I have outlined in the past are the 5s. ordinaries of Bell's Asbestos and Engineering. This company has now announced a dividend of 40 per cent. for 1951 against 35 per cent, for each of the three preceding years. Net profits of the group have more than doubled at £469,200 against £221,900 and the net profit, after a much heavier taxation charge, is up from £91,400 to £179,000. On these figures the 40 per cent. ordinary dividend is covered about four times, so that one need not be surprised that following the profit and divi- dend statement the 5s. shares have improved from 31s. 3d. to 33s. 9d. At the higher price now ruling the yield is still 6 percent., which seems to me a good return on a progressive equity of this kind. Bell's Asbestos specialises in various applications of asbestos supplying a wide range of products under the " Besto- bell " trademark. An agreement with Turner and Newall assures continuity of raw materials and in recent years the group has steadily and successfully expanded its inter- ests by acquiring smaller specialised engineer- ing businesses. Large sums have been ploughed back out of profits and the modest increase in dividend now announced is no departure from cautious distribution policy. Significantly, the decision has been taken in face of the company's obvious vulnerability to Excess Profits Levy.
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