IN VESTMENT NOTES
By CUSTOS
AFTER a tremendous churning over in the volume of trade the 'bulls' seem to be gradually getting the upper hand in the equity share markets, as I thought they would. One broker ,explained the position very clearly in a circular to clients when he said that having regard first to the probability of a rise in the gilt-edged market and a lowering of the long-term rate of interest; secondly, to the potential pressure of American funds seeking investment in British and continental equities; and thirdly, the possibility that the election date might yet be postponed from October to the spring of 1960, it would be unwise to delay the purchase of sound equity shares. As most investors, both institutional and private, have been building up a liquid position in anticipation of a pre-election fall in markets, this broker suggests that the potential demand for first- rate equities is in excess of the supply of shares. That is certainly the opinion of most jobbers and seems to explain the upward trend of most markets. Nevertheless, I would avoid buying the 'leaders' which are on a comparatively low yield basis and find shares in the second rank which are not so vulnerable to political shocks.
Oil Shares
Most investors had CANADIAN EAGLE in their portfolio as well as SHELL and had suffered a heavy depreciation on both holdings. It therefore came as a great relief to hear of the offer of two ROYAL DUTCH and three SHELL for every twelve- Canadian Eagle, causing the last to jump 25s. td 81s. 3d. The Royal Dutch-Shell group already had 21 per cent. of the Canadian Eagle equity and when the offer is accepted it is their intention to put Canadian Eagle into liquidation. This marriage is really making honest women of both Royal Dutch and Shell, which previously could switch profits, as they chose, from the wholesale shipping (Canadian Eagle) end to the retail (Shell-Mex) end or vice versa. It is said that the merger will make no difference to the earnings of Shell as both its profits and its capital will be increased by about 61 per cent. But will there be any tax savings? The position is too complicated for the outside shareholder to discover but it should be read, 1 think, as a bull point for Shell, and if Canadian Eagle can be bought at a discount on the terms offered it should be regarded as a cheap way of buying Shell. I was disappointed, however, by the meagre raising of the BURMAH OIL dividend from 2s. 7d. to 2s. 9d. tax free, which merely gives shareholders the benefit of the new rate of income tax, and by the announcement of a one-for-one scrip issue. Of all bonuses the one•for-one is the least desirable for shareholders as it brings no promise or suggestion of a subsequent rise in dividends. The company is writing up its huge BP holding from 10s. to 20s.----inadequate again as BP shares are quoted in the market at 50s. Not so long ago Burmah Oil used to be valued in the market at a price which barely covered the market value of its BP and Shell holdings, but today these holdings are worth only about 75s. and Burmah Oil is quoted at 81s. ex dividend to yield 5.4 per cent. It is not unreasonable, but I prefer BP con- vertible debenture at 105 to yield 5+ per cent, In July £100 stock is convertible into forty ordinary shares and in July, 1960, into thirty-two. By that time Iraq might be happily under Colonel Nasser's influence instead of Khrushchev's.
Insurance Shares and Prudential With some good dividend announcements there has been a substantial rise in insurance shares, but the proposed merger between COMMERCIAL UNION and NORTH BRITISH AND MERCANTILE should remind Investors that if the continued adverse experience of underwriting in America is the force behind that deal it is still probably wise to avoid the com- posite companies and keep to the life companies. PRUDENTIAL has a subsidiary in America, but this does not worry the 'A' shares which take only a fraction of the profits of the general branch, their main source of income being the life and annuity Profits. Of the surplus from the life branches 93 Per cent. went last year to the policy-holders and the balance to the 'A' shares, whose dividends Were increased from 1471 per cent. tax free to 162k Per cent. tax free (6s. 6d.). At 1 I+ the 5s. 'A' shares return 4.9 per cent., which must still be regarded as an attractive yield in these bull market days, especially as their dividends may be expected to rise gradually over the years ahead. Prudential
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added to its assets last year by just over £1 mil- lion a week, the total now being £965 million, of which £208 million or 211 per cent, are invested in ordinary shares.
Unfashionable Shares In the bull market which ended in July, 1955, nuclear power shares were the most fashionable. Today they are the most unfashionable. And no wonder when. BABCOCK AND WILCOX, the boiler- making partners of the nuclear power group headed by ENGLISH ELECTRIC, reports a 30 per cent. drop in gross trading profits and a 40 per cent. drop in the net. The dividend is held at 13 per cent, but is only twice covered. At 49s. the shares yield 53 per cent. REYROLLE, a member of Nuclear
Power Plant, has barely maintained its profits and the chairman. Mr. H. H. Mullens, forecasts a fall in production this year. The shares at 88s. 6d., yielding 3.95 per cent, on the unchanged dividend of 171 per cent., seem too high. SIMON CARVES, which caters for the heavy engineering and capital goods trades as well as for nuclear power, main- tains its profits but does not increase its dividend of 25 per cent., covered about three times. The 5s. shares have fallen to 30s. 9d. to yield 4.1 per cent. The time has not yet come to buy these un- fashionable shares, but the patient holder can re- assure himself that their day will eventually come -and has in fact cone nearer with the increase in capital spending favoured by the Chancellor in his Budget.
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