Rolls on order
PORTFOLIO JOHN BULL
I must at once tackle the question of where to place my uninvested funds. There is no percentage in leaving them with my clearing bank. Interest rates are rising and will, as I remarked a few weeks ago, continue to do so for the rest of the year. As this is an important determinant of portfolio strategy, it is worth looking at interest rate trends in some detail. The starting point, as with so many other exer- cises, is sterling. Last week's bad trade figures lopped 13-6c off the rate, leaving the pound at $2.781—in other words, on the floor. In these circumstances, London interest rates cannot be allowed to get out of step with either New York or the Eurodollar market.
With this background, my course of action will be as follows. For the time being I shall turn to the local authority market. With the comparatively small funds at stake in my folio I will not get the best rates. Money at seven days' notice will bring me a return of 54 per cent compared with 54 per cent for the big boys. There I shall stay until I can see the rise in interest rates petering out. Then the correct move would be into the short end of the gilt-edged market, where even now the average yield is on the 64 per cent mark. There I would rest until I was con- vinced the interest rates were moving down again: at that point, the best place to be will be at the long end of the gilt-edged market.
Whereas you speculate in gilt-edged—the plan I have described about amounts to that —you invest in equities : which brings me to Rolls-Royce. At 48s ljd the shares return 4.6 per cent and sell at 16.7 times earnings. Thus its market rating is only slightly above average. The Financial Times-Actuaries 300- share index now shows a similar dividend yield and a price/earnings ratio of 16.1. Yet Rolls-Royce has certain assets which few other companies can match. Outstanding among these is its order book, which is substantial and which takes it well into the 1970s.
For the purpose of comparison, 1965 is as good a base year as any. In that period Rolls- Royce and Bristol Siddeley together achieved a turnover of about £200 million. Last June, the chairman, Lord Kindersley, forecast that sales next year would exceed £300 million. In fact, outside observers reckon that the group will be selling £450 million a year in the early 1970s. Key to its prospects is the success of the Spey engine, which is going into the Buccaneer Mark 2; the HS 801 maritime reconnaissance plane: the us Phantoms which the UK is buying; and, most impressively, into the us A-7D Corsair II subsonic fighter- bomber (the first break into the us military market). At the same time, demand continues at a high level for older engines such as the Dart, the Avon and the Conway. Spares busi- ness is particularly good.
Two factors hold the shares back. The first is the realisation that, to finance this enormous programme, Rolls-Royce will need to come to the market for fresh funds at regular intervals. And secondly, of course, there is the worry which attends any firm working in the ad- vanced technologies—what sine its research and development bills will be and what pro- gress it is making with the designs which will turn into the products of the middle and late 1970s. On the second point, I rely on the group's splendid record. As to the first, I think it is worth bearing in mind that a heavy financing programme runs better on rising than static dividends. The 'Rolls-Royce board realises this.
Valuation at 18.0ctober 1967
100 BAT at 84s 3d f421 100 Empire Stores at 54s 3d xd. £271 125 Rolls-Royce at 48s 14-d £301 Cash with local authority at 54% £4.004 Total £4,997
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