FINANCE AND INVESTMENT
By CUSTOS
AFTER the storm, a calm. At long last the gilt-edged market is able to 'take a much- needed breather and, at the moment, is .attempting, with some success, to stabilise itself on a long-term interest basis of 41 to 4f per cent. In doing so, it has derived virtually no help in the shape of direct inter- vention by the Government broker or from any whisperings from Whitehall of easier times to come. That, in my view, is as it should be.at this early stage of the disinfla- tion programme. If there is to be a recovery, it is all the better that it should spring from a genuine conviction in the market that stocks are cheap, by which I mean that, from a long-term investment standpoint, they are worth buying. That point has not yet been reached. While the selling which precipitated the recent fall has abated, the institutional buyers on which gilt-edged are nowadays dependent have re-entered the market only in the most tentative way. Everyone is still waiting for a lead but apparently the feeling of apprehension is slowly diminishing.
If evidence were needed of the improve- ment in sentiment it has surely been forth- coming in the reaction in Throgmorton Street to the latest developments in the currency field. Mr. Butler's decision to pay up in full on the American and Canadian loads on December 31st, so far from sending a shudder through markets, has helped the rally. So has the decision, to give a measure of freedom to foreign exchange dealings in London. As I emphasised last week, there is no reason yet awhile for expecting a sharp or broad upturn in Stock Exchange prices but equally there is no need to fear a fresh ' slump. The right policy is surely to keep reasonably liquid but not to jettison sound industrial equities at present prices.
Lancashire Cotton Board Against the background of falling prices for textile shares and reports of some con- traction in orders, to say nothing of the threatened competition from Japan, the latest figures of some of the larger units in the Lancashire cotton spinning industry make cheerful reading. ' Folloviing the sharply increased profits announced by Combined Egyptian Mills and Amalgamated Cotton Mills Trust come record figures from the Lancashire Cotton Corporation. For the year to October 31st, net trading profit has jumped from £3,754,000 to £6,789,000. Even this comparison does much less than justice to the improvement in trading results, in that the. latest figure has been struck after charging £3,435,000 for taxation, compared with £1,685,000 a year ago. Net profit, after tax, has risen so sharply that nobody could quarrel with the board's decision to raise the Ordinary dividend from 121 per cent, to 15 per cent., a decision which involves a distribution of only an extra £55,000 net. As usual, very large allocations are made out of profits to various reserves, and I have little doubt that when the balance-sheet appears it will show the Corporation has a strong liquid financial position. Following the announcement of the profit and dividend the £1 Ordinary units have improved from 42s. to 43s. 6d. At this level they yield approximately 7 per cent. on dividend and well over 60 per cent. on earnings. While I fully recognise the vulnerability of the earnings of the Lancashire cotton trade to a contraction of consumer demand on the one hand and to Japanese competition on the other, I feel that these shares are still very reasonably priced.
Turner and Newall Decision In sharp contrast with the increased divi= dend announced 'by Lancashire Cotton, which in my view is consistent with the policy appropriate in present conditions of moderation and restraint, is the mere main- tenance of the 20. per cent. distribution by Turner and Newall, the asbestos- combine. Admittedly, this company has consolidated the special 21 per cent. cash bonus paid a year ago into the dividend rate but, even so, the £561,000 net which the 20 per cent. distribution involves appears to be covered about eight times, by the published net earn- ings of £4,600,000. Group profits at £11 million before deduction of tax have risen by approximately 57 per cent. After meet- ing the tax charge of £6,600,000, against £4,200,000, consolidated net profit for the year to September 30th is up by £1,600,000 to £4,600,000. The question arises, how far this net profit can be treated as a true net figure available for distribution. Here one has to take account of the fact that around £2,700,000 has been _ absorbed by specific reserve transfers. The board has allocated £920,000 against stocks and £1,750,000 for replacement of fixed assets. If one deducts these two allocations before arriving at a net figure available for distribution then it would appear that the 20 per cent. on the Ordinary stock is covered just over three times. I still feel that the board has pursued an ultra-cautious distribution policy. Turner and Newall £1 Ordinary units have improved in the recent market rally from 88s. 3d. to 90s. At this level they are yielding a little over 41 per cent. As a " blue chip " equity they seem to me to be worth holding.
Harrods (B.A.) Surprise
Having called attention some few months ago to the speculative merits-of the £1 8 per cent. Cumulative Preference shares of -Harrods (Buenos Aires) I am well satisfied with the results now disclosed for the year which ended on August 31st. Group trading profits have risen by £426,000 to £943,000, after charging foreign tax. An, exchange profit of £636,000 compares with the heavy loss of £1,900,000 incurred in 1949-50. Thanks to 'receipt of remittances from Argentina under -the terms of the Anglo- Argentine Protocol of April 23rd, 1951, the company is now able to clear off the arrears of dividend on the 8 per cent. Preference shares and has also sprung a surprise on the market by declaring a 5 per cent. divi- dend on the Ordinary capital. If this were the whole story, the 8 per cent. £1 Preference shares would scarcely be standing at a sub- stantial discount on their par value, but_ unfortunately, recent developments in Argentina do not provide the basis for much enthusiasm. Trading profits-themselves have owed a good deal to a condition of con- tinuing inflation, and on the remittance side nothing appears to have been done to allow British companies to transfer their profits over the exchange in respect of any period since August, 1950. On top of that is the threat that the Argentine Government is contemplating the purchase of British stores undertakings. These uncertainties explain the current quotation of the 8 per cent. II Preference shares around 13s., at which the yield offered is over 12 per cent. It is as well to keep in mind, however, that Harrods (B.A.) has sound management and a strong balance-sheet, as well as a progressive earn- ings record-in anything approaching reason-
able conditions. My feeling is, therefore, that holders of the 8 per cent. Preferences are justified in awaiting a further improve- ment in the price.
Cairn Line Strength
The recent bid of £8 a share for the 6s. shares of the British and Burmese Steam Navigation Company has greatly enlivened the shipping share market durng the past week. Speculatively-minded investors have argued that if such a mouth-watering figure is given for the assets of one company attractive bids may well be forthcoming for others. This explains the sudden strength, after the recent relapse, in the shares of Silver Line, an old favourite of these notes, now up to 24s. 3d., Dene Shipping at 33s. 6d. and Reardon Smith at 52s. In all these cases prices have been hoisted to levels which are certainly not justified on current rates of dividend, however reasonable they may appear on the basis of the high rates of current earnings. In short, assets values have begun to play their part in the market. While I do not quarrel with this basis of assessment of share values, experience teaches us that it is sometimes dangerous, in the sense that if no bid comes along and earnings begin to fall off, the share market falls are just that much more severe. A shipping share which seems to me to have investment merit at its current level is the 10s. Ordinary of Cairn Line of Steamships, who are closely 'associated with Furness, Withy and Company and operate cargo vessels between Great Britain and Canada. For each of the past five years this company has paid a 71 per cent, dividend well covered by earnings and has always main- tained a strong balance-sheet position. At the end of 1950 net liquid assets amounted to £783,416, or the equivalent of about the present market price, thus leaving nothing for the company's fleet. Since that date liquid resources have been drawn down, as the company has had on order two vessels for delivery early next year. At the same time, in spite of rising operating costs earn- ings have benefited from the improved level of freight rates, and it will be disappointing if the dividend for 1951 is not increased. At today's price of '13s. 3d. the 10s. shares are offering a return of well over 5 per cent, on a well-covered dividend. Earlier this year they were quoted at 15s. and in 1947 they touched 20s. in the -market.
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