FINANCE AND INVESTMENT
By CUSTOS
AFTER Mr. Butler's second instalment of measures to meet the crisis some investors may feel that the fate being prepared for them in Whitehall is little short of death by a thousand cuts. If any doubts—or hopes— remained that the new Chancellor might shrink from a really rigorous policy of retrenchment they have now been effectively dispelled. The cuts in the capital investment programme are drastic and widely spread ; they will obviously bring serious adjustment problems to many sections of industry. So, too, will the projected swing over from home to export markets. If that were all it would be enough to impose powerful restraints on investment but, in my view, it would not call for a fresh downward movement of prices either of gilt-edged stocks or industrial equity shares, except, perhaps, in the tobacco group and some of the other groups supplying non-essential consumer goods.
The Budget Shadow
Unfortunately, two other obstacles loom ahead, and it cannot be ruled out that the measures required to surmount them may bring a further fall in security values. One is the problem created by surplus domestic spending-power now that the volume of goods available for the home market is being reduced. That Mr. Butler regards this inflation threat seriously is obvious from his decision to bring forward Budget Day from April to March 4th, but this means, from the market 'standpoint, that the breathing-space after the cuts just announced is short. Will Mr. Butler rely mainly on rationing through the purse, i.e. draining off the surplus spending power in higher prices, or will he give some fresh incentive to savers ? I can scarcely believe that he is planning to increase income tax. What is clear, how- ever, is that this coming budget will be more than mildly disinflationary. The other major uncertainty is in the field of money- rates. So far the hopes of the dearer-money enthusiasts of a further rise in Bank Rate have not been fulfilled, but it is much too soon to assume that before stability is restored the Chancellor may not feel impelled to give the dearer money screw another turn. I get the impression that for the moment Mr. Butler is well satisfied with the results of the present higher Bank Rate and is content to feel his way. That, I think, is the right policy, although he must not shrink from raising money-rates merely to hold down the cost of the Government's short-term borrowings. The implications for investors ? For the short-term, ob- viously not very good, but not disastrous. Taking a longer view—and assuming, as one must, that Mr. Butler sees it through— the outlook has its encouraging features. I am prepared, however, to see the ultimate recovery in markets start from a level some- what below today's prices.
E.M I. Prospect Following on the heels of the large-scale new financing plans announced by Imperial Chemical Industries and Associated Elec- trical comes news of a " rights " issue—of a much less ambitious kind—by Electric and Musical Industries. In this instance the
board's proposal is to issue 1,741,724 new Ordinary 10s. shares, in the proportion of three-for-ten, to the present Ordinary stock- holders at a price of 12s. 6d. each. The aim is to raise something over £1 million of new money, which will be applied in reducing the group's bank borrowings which by the end of November last had risen to £2,500,000. In the board's circular it is disclosed that this substantial figure of bank indebtedness, which represents a rise of nearly £2 million in the five months from the end of June, was the result of a sharp increase in work in progress. In the circumstances one might have thought that the new financing would be on a heavier scale, but presumably the new resources are judged adequate to cover the group's financial requirements for some time ahead. The activities of the E.M.I. group are now broadly based, and obviously rearmament contracts should soon begin to figure largely in total turnover. On the purely domestic side the directors frankly state that there have latterly been signs of sales resistance and they hint that profits for the year to June 30th, 1952, may show some reduction from the peak level attained in the preceding year. That does not imply, however, that Ordinary shareholders need worry about the maintenance of the current dividend rate of 12 per cent., which is covered by a large margin of earnings. As in the case of other companies who have made new issues on " rights " terms, there has been a sharp fall in " Emmies " in the market. From a level of 18s. 9d. three weeks ago the 10s. shares have now come down to 15s. ex-" rights." The indicated yield on the 12 per cent. dividend is therefore 8 per cent. It seems to me that investors who do not mind taking some measure of risk might watch the " rights," now quoted around 2s. 4id., for a suitable buying opportunity, since they may well be available around 2s. on dull days. That would mean that a buyer would be getting in on a free-of-stamp basis and on a small broker's commission at 14s. 6d.
Tate and Lyle Results As might have been expected from the sharp increase in sugar imports, the latest results of Tate and Lyle, the leading sugar refiners in this country, which cover the year to September 30th, 1951, have estab- lished a new record. Trading profits have moved up from £3,052,558 to £3,723,868, but it is noticeable that the net figure, after allowing for a substantially higher provision for taxation, is slightly down at £960,300. In the City there had been no expectation of any increase in the Ordinary dividend above the 20 per cent. rate but there ma Y be some disappointment that on the basis of the latest figures the cover is shown to be only about one-and-a-half times. Moreover, the cash position in the preceding balance-sheet, which may well be shown to have deteriorated by September 30th, 1951, was by no means strong. It is hard to avoid the conclusion that at the present level of 52s. 9d., yielding 5i per cent., Tate and Lyle 15s. Ordinaries are fully valued. The more dynamic share is the Is. Ordinary of Silvertown Services, who carry out the lighterage and road transport re- quirements of Tate and Lyle. In this instance the dividend of 87i per cent, is covered
by earnings about four times over, while the yield on the Is. shares at 13s. 14d. is 61 per cent. The prosperity of Silvertown Services turns largely on the achievements of/Tate and Lyle, but it seems to me that it is likely to be much more clearly reflected from the shareholders' point of view in higher dividends than in the case of the combine itself. Tate and Lyle look dear by com- parison with other " blue chip " equities snch as Imperial Chemicals and Lever Brothers.
A Shipping Equity
I outlined last week the investment merits, as distinct from the speculative attractions, of the Ordinary shares of Royal Mail Lines. Another shipping equity which has a similar appeal, in that it offers a generous dividend yield, along with a substantial excess of asset values above the current market price, is the £1 Ordinary unit of William France Fenwick and Company around the current market pr:ce of 59s. France Fenwick were established just over 50 years ago and operate as shipowners and wharfingers, controlling an insurance subsidiary. At December, 1950, the fleet comprised 22 ships, mainly coastwise tramps carrying coal, &c., and aggregating over 75,000 tons dead weight. Although the cargo shipping trade is notori- ously subject to ups and downs, Ordinary dividends have been paid every year since the company's formation, even during the 1929-33 depression. Few companies, even in much more stable industries, can match that record. At the end of 1950 the com- pany's surplus liquid assets exceeded £700,000. Total net assets, including the fleet and other fixed assets at book values, were rather more than £3 on the £1 Ordinary units. It is estimated that the approximate present market value of the France Fenwick fleet, including the benefit of the orders placed for new tonnage, plus other assets, gives the £1 Ordinary units a break-up value of at least £6 a share. These facts underline the strength of the assets position. This could only become important rnarket-wise in the event of there being some take-over bid. If one is content to concentrate on income considerations the dividend yield on the basis of the 15 per, cent, rate paid in recent years is just over 5 per cent. On top of that, however, this company has distributed a 3 per cent, tax-free bonus in each of the past five years, which was supplemented last year by an additional 3 per cent. tax free to cele- brate the company's 50th anniversary. If one merely takes the 3 per cent. bonus as a regular distribution, the gross yield on the shares at 59s. is just over 7 per cent. Last May the chairman intimated that, subject to there being no world calamity, shareholders could look forward " with confidence and optimism." Since that date there has been a considerable advance in freight rates, which suggests that the 1950 earnings of just over 41 per cent. on the Ordinary capital are likely to be exceeded by a substantial margin. I am not suggesting that France Fenwick Ordinary shares are an exciting purchase in the shipping market, but they seem to me to have the attraction, like R.M. Lines, of strong asset values, a good dividend yield and bright earnings prospects.
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