WISE INVESTMENT

WHATEVER views one may hold about Mr. Chamberlain's proposals for financing the defence scheme, it is at least quite clear that the internal purchasing power of the country is to be maintained on a high level for several years to come. I therefore feel safe in assuming that most industries catering for mass consumption, such as the retail stores, the provision companies, motor makers, and cinema undertakings, have entered a fairly long phase in which their turnover should increase.

If that were the whole story it would be an easy deduction that all these companies, will enjoy an appreciable rise in earnings, but that would be reckoning without the element of costs. I think it is certain that costs of production in most industries are going to be increased during the next two or three years both by higher wages and by dearer raw materials. In some industries, of which the provision trade is a striking instance, competition is at present so keen that higher costs cannot be passed on in the form of higher selling prices ; hence profits and share values have been falling despite the bigger turnover.

* * * * RETAIL STORES PREFERENCES

The retail stores, as the 1936 reports remind us, are more happily placed. Competition is there, but it is not so intense as to prevent the stores managements from matching dearer raw materials by higher selling prices. I am confident, therefore, that the further expansion in turnover in prospect for the stores companies this year will be reflected in a further moderate rise in profits. In these conditions I regard the preference issues of some of the stores and drapery companies as offering an attractive medium for investors seeking generous yields combined with reasonably strong security. The following is a group which I recommend from this point of view :— Debenhams 6.4% Lt Cum. First

Prefs. .. ..

Debenhams 64% £ 1 Cum.

Second Prefs. .. .. Debenhams 7% 'cis. Third Prefs. Horne Bros. 7% LI Cum. Prefs. John Lewis 7% Li Second Prefs. Plummer Rod:Bs 7% £i Second

Prefs. .. .. ..

No. of times dividend covered

4} 34

24 xf

21

2

Current price

28s. 6d.

263. 3d.

I 2S. 6d. 25s. 26s. 6d.

25S.

Yield

0/ /0

L s. d.

4 II 3 4 19 0 5 10 0 5 12 0

5 6 o

5 12 o

Each of the four companies included in the list is increasing its turnover and profits, opening up a prospect of stronger cover for its preference dividends. The average yield on this group of shares is over 5 per cent.

* * * * CANADIAN PREFERRED SHARES Now that President Roosevelt has followed his polite hint to British investors that their attentions to Wall Street are not welcomed by a fairly blunt threat of disciplinary measures, one cannot be surprised that more and more speculative interest is being diverted to Canadian shares. As I have already indicated, there is unassailable evidence that Canada's trade is going ahead every bit as rapidly as that of the United States, opening out a very wide field of "recovery investment." The biggest speculative possibilities are in the common or ordinary shares, but for those unwilling to stretch out quite so far there are a number of preferred shares carrying arrears of dividend which involve less risk and have the merit of paying for their keep.

In this category the 61 per cent. preferred shares of the Canadian Cement Company look to me as attractive as any at 107 dollars. This company has a thorough up-to-date plant and a sound financial position. Net profits for the year ended November 30th, 1936, rose from 37,693 dollars to 663,242 dollars and preferred dividends are to be resumed next month with a payment of one dollar per share. As last year's net earnings, adjusted for the interest saving resulting from the conversion of the company's bonds, were equivalent to nearly five dollars on the preferred, I anticipate that a quarterly distribution of one dollar will be comfortably maintained, with every prospect of the rate being raised to the full 61 per cent. within a reasonable period. There are now 29 dollars of dividend arrears included in the current price.

DOMINION TAR PREFERRED The 61 per cent. preferred shares of the Dominion Tar and Chemical Company are another issue with similar attractions. This company controls virtually the whole of Canada's creosoting trade and obviously stands to benefit from the resumption of maintenance expenditure by the railways. It also has extensive interests in the building trades which promise to be abnormally active for the next two or three years. A strong recovery in earnings is already under way; net earnings rose from 553,630 dollars to 966,o12 dollars in 1935. Last year's figures have not yet been-issued, but I understand that another marked improvement took place and that the full 61 per cent. dividend on the preferred capital was roughly covered.

Quoted at I14 dollars, which includes 291 dollars of dividend arrears, these preferred shares are clearly attractive now that the full dividend is again being earned. As discussions of a scheme to deal with the arrears of dividend are already taking place, I look for an early resumption of preferred dividend payments.

ENGLISH ELECTRIC RECOVERY

Even after their rise in recent months from 26s. to 32s. 6d. English Electric £x Ordinary shares seem to me to be an attrac- tive industrial investment in the light of the company's latest accounts. An increase in profits in 1936 from £130,142 to £235,306, following a similarly striking improvement in 1935, is an excellent achievement, especially as the company has had to face quite a substantial increase in raw material costs. Ordin- ary shareholders are not to receive a dividend for last year, but are within sight of dividends now that all arrears of preference dividend are to be cleared off.

The important point is that net earnings in 1936, allowing for one year's preference dividend, were equivalent to II per cent, on the Ordinary capital, so that the shares, at 32s. 6d., are offering an earnings yield of over 7 per cent. If that were all, the price might be regarded as an adequate reflection of the position, but earnings are still rising, the company's order-book at the end of the year being the largest in its history. I shall be surprised if earnings for 1937 do not reach a minimum of 15 per cent. on the Ordinary capital, which would justify a price of at least £2 for the shares.

Venturers' Corner

It is usually worth while in these days of rapid industrial recovery to look into the position of companies which have reorganised their capital. In capital reorganisation schemes the policy usually adopted is to use the pruning knife drastically, on the theory that if assets require to be written down the cut should be deep enough to minimise the possibility of having to make further adjustments later on. Consequently, it may happen, and there have been several instances in recent years, that with growing trade and the improvement in manage- ment which usually accompanies capital reconstruction schemes, the writing down turns out to have been much more severe than was really required.

I should not be surprised if, among the recently reorganised companies, Allen West, the Brighton firm of electrical switch- gear manufacturers, succeeds in earning good profits on its written-down capital. Last year this company cut down its capital by nearly one-half, the present ordinary shares being of 5s. denomination. As the demand for the company's type of product has increased considerably in recent months ar d the works are now fully employed, I feel confident that the next accounts, dtie in April, will Show a sharp increase in earnings sufficient at least to justify the price of 7s. 6d. at which the 5s. shares are now quoted. In the matter of slividends the board is hound to be conservative, as the reserve position needs strengthening and growing business may require additional funds, but, as an equity in a progressive company, its shares should stand considerably higher in 12 manths' time. Custos.

[Readers' enquiries, or requests for advice, regarding particular shares will be answered periodically as space permits. Cor- respondents who do not desire their names to appear should append initials or a pseudonym to their questions.]