FINANCE AND INVESTMENT
By CUSTOS
WITH only a week remaining before the country knows its political fate investors are understandably acting cautiously. Those who, some little time ago, took an optimistic view of the Conservatives' chances have already made their dispositions. They have bought good industrials and commodity shares which, in the absence of statutory dividend limitation, may reasonably be expected to raise their dividends. Prices have risen in response to this sort of buying, and the pause immediately before the election can, I think, be easily explained in terms of the investor's natural reluctance to accept the election risk at the higher level of quota- tions. In this attitude of wait-and-see-he has now been strengthened by the unplea- sant developments in the international poli- tical situation and by the ominous indica- tions of a new balance of payments crisis. If, as seems a strong probability, hopes are realised and a Conservative Government, with a good -working majority, is returned, I should expect to see a fresh rise in prices over a broad front—to include gilt-edged stocks as well as equity shares. But there will be speculative profit-taking, and the second thoughts which must follow a sober assessment of the economic and international political outlook. I do not therefore look for a sustained or runaway rise, nor would it be justified. Markets are already selective and they will remain so.
Dividend Problems Amid the uncertainties created by the threatened dividend freeze boards of direc- tors making their dividend decisions within a week or two of polling day are obviously put in a difficult spot. It is not surprising, therefore, that the announcements now being made do not conform to any well-defined pattern. In some instances—relatively very few—dividends have been raised well above the threatened ceiling levels, the directors apparently being quite prepared to take the risk of having to cut dividend rates severely in the event of statutory limitation coming into force. At the other extreme are those companies which. have carried out the re- quirements of the Gaitskell freeze- -to the letter, either by merely maintaining present rates or where necessary cutting back divi- dends to the indicated maximum. Following the middle course—and in my view the most appropriate one—are those companies which have chosen to conform temporarily to the requirements of the freeze, but at the same time have indicated to their shareholders what they would have been prepared to pay and, in fact, intend to declare in the absence of statutory limitation. These companies have also taken the appropriate action by setting aside to a specific reserve the amounts required to pay the additional dividend if the election goes the right way.
Calico Printers' Decision Among the companies which are not pay- ing a higher rate but which are not cutting back their dividend to 'the indicated freeze level are the Calico Printers' Association. Having stepped up the Ordinary dividend from 8 per cent. to 121 per cent a year ago this company is now threatened under the Gaitskell proposals with the necessity of pay- ing only 10; percent. Instead, the directors have chosen to maintain the 121 per cent. rate " in view of the low average return received in the past by the Ordinary stock- holders." Against the background of the latest profit figures this decision must appear thoroughly justified. Group profits for the year to June 30th have risen from £960,573 to £1,073,318. Moreover, that comparison greatly understates the actual improvement in trading results, in that the latest figure has been struck after charging £2,320,867, against £1,367,564, for taxation ; £1,004,549, against £834,793, for maintenance and depre- ciation ; £79,210, against £135,831, for depre- ciation of investments, and after transferring £765,157, against £264,242, to reserves against stocks and debtors. If one adds back these deductions it will be seen that gross profits must have increased from approxima- tely £3,570,000 to £5,300,000. In maintain- ing the 121 per cent. dividend the board are raising the allocation to general reserve from £600,000 to £700,000 and adding £50,500 to the carry-forward. The important point is that the 121 per cent. dividend is being paid out of earnings of over 90 per cent. The £1 Ordinary units, which were quoted at one time this year at 35s. 6d., are now stand- ing at 46s. At this level they yield nearly 51 per cent. on the 121 per cent. dividend, which is covered over seven times. If the freeze becomes effective the return on a 10; per cent. payment would be about 41 per cent. In my view the units are well worth holding. They are a good election stock.
Barber. Textile Yield Another Lancashire textile concern to re- port substantially higher earnings is the Barber Textile Corporation. In this instance profits of the group have risen from £421,686 to £625;601, indicating a rate of earnings of over 100 per cent. on the Ordinary capital. The directors intend, in the event of the Dividend Control White Paper nbt becoming law, to pay a final dividend of 10 per cent. supplemented by a 71 per cent, cash bonus, which would raise the total distribution to 271 per cent. on a capital which has been increased by a scrip bonus of one new share for nine. To conform with the dividend freeze the previous rate of 221 per cent would need to be cut to 191 per cent. Following these results the 4s. shares have improved a few pence to Ils. 41d. At this level they would yield over 61 per cent. on the indicated ceiling rate of 191 per cent. under statutory dividend control—not a bad return on a dividend which would be covered. over five times by earnings. If, as seems more likely, the 271 per cent. rate becomes affective, the shares would be yielding nearly 11 per cent. In view of the group's strong balance sheet position and the ample earn- ings cover for the dividend the shares look worth holding on election hopes.
G.U.S. Finances Having been duly impressed by the sharp rise in the group's profits from £5,896,913 to £8,161,150, shareholders h Great Universal Stores will look in the full accounts for some explanation of the board's dividend policy and for guidance as to the board's attitude towards the group's heavy bank indebted- ness. On the question of dividends Mr. Isaac Wolfson contends himself with the remark that the 40 per cent. rate, although covered by a huge margin of net earnings, is the maximum which .the company can pay under the threatened dividend freeze. Shareholders are still left to make up their own minds whether this implies any inten- tion to raise the dividend to a level more commensurate with earnings if the dividend freeze is brought to an end. Mr. Wolfson is also rather vague about the group's finan- cial position. At March 31st bank loans stood at the formidable figure of £8,687,403, an increase of over £1,300,000 on the year. -Against these loans there were cash balances of £3,168,707, leaving a net liability of over £5,500,000, or £1,189,483 more than at March 31st, 1950. It seems implicit in Mr. Wolfson's latest annual statement that he takes -a comfortable view of this position, presumably on the ground that it has been good business—and still is—to expand and put money into stocks rather- than repay bank debt. So far, Mr. Wolfson's expan- sion policy has paid handsomely, although it is difficult from the accounts to determine how much of the rapid growth of earnings must be attributed to volume of turnover and how much to higher average selling prices. Latterly, there have been signs in the furniture • trade, in which the Great Universal group is so largely interested, of a falling off in demand, keener competition and lower prices, but these tendencies Mr., Wolfson regards as essentially healthy. He is an alert and successful merchandiser and so fat from having decided to consolidate he is still planning fresh expansion' schemes.
English Stockings For investors who like low-priced shares the English Stockings Ordinaries, which are of the unusual denomination of 4d. and are now quoted in the market just under 8d., look an interesting proposition. This com- pany is not an operating concern but merely holds investments. By far its largest holding is just under 574,000 of the 5s. Ordinary shares of Klinger Manufacturing, the silk stocking makers. Klinger has a remarkable trading record, its profits having risen stead- ily over the past ten years from around the £100,000 mark to over £400,000. Good divi- dends have been paid and recently the com- pany has given a 100 per cent. scrip bonus, as well as making a new issue on attractive " rights " terms. With Klinger shares quoted in the market around 17s. 6d. English Stockings' holding is today worth approxi- mately £500,000. Apart from that, it holds other investments worth over £100,000, giving total assets of something over £600,000. In relation t6 the issued capital of £191,200, which is all in Ordinary shares of 4d. each, this indicates a break-up or assets value of over ls. a share. As to earn- ings, English Stockings has gradually raised its dividend from 7 per cent. in 1945 to 12+ per cent. for 1950, when the dividend was covered by earnings of nearly 20 per cent. At 8d,-, therefore, the shares are offering a yield of 61 per cent. on a dividend which may well be increased, assuming the freeze is ended, at the end of this year.
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