FINANCE AND INVESTMENT
By CUSTOS
THE City's second thoughts on Mr. Butler's Budget are proving decidedly unfavourable for markets. Whatever the arguments advanced in some quarters that the Budget is inflationary, investors are behaving on what I think is the more realistic assumption that we are in for a spell of deflation. Read- ing between the lines of the Budget debate one cannot avoid an impression that a recession in trade is no longer regarded in Whitehall as a remote possibility. There are unmistakable indications that the danger of a contraction of overseas trade and the spread of deflationary forces are now being taken quite seriously. It is this sort of feel- ing in the City which, in my view, is mainly responsible for slithering prices and the absence of investment support.
Time for Waiting
How far will the market setback go ? Much, though not everything, turns on the behaviour of gilt-edged prices. In that section the major adjustment to the 4 per cent. Bank Rate must be already complete, but it is difficult to see how prices can settle down on to a new basis until there is fairly conclusive evidence that internally and externally Mr. Butler's medicine is bringing results. Although the first indica- tions on the external front—a sharp improve- ment in the sterling-dollar rate—are encour- aging, the time for rejoicing is obviously not yet. It is going to take several months for the balance of payments to be brought under effective control and that is only on the assumption that export markets can be held and we manage to steer clear of major labour troubles. With so many obstacles the road ahead I am not surprised that security prices have been moving down, especially in those groups of industrial equities, such as tramp shipping shares, where speculative enthusiasm had hoisted prices unduly. Uncertainties in trading prospects, the arbitrary incidence of the proposed Excess Profits Levy and the obscure business outlook in America all point at present to the advisability of a policy of waiting.
Imperial Tobacco Finances
To add to the market's discomfiture this week there have been reports of several large-scale industrial financing operations having already reached an advanced stage. The two companies whose names have been linked with such possibilities have been Imperial Tobacco and the " Shell " oil combine. So far as Imperial Tobacco are concerned, Sir Robert Sinclair offered no kind of confirmation of any new issue intentions at the company's annual meeting in Bristol. On the contrary, he pointed out that since the company will be compelled this year to draw heavily on its stocks of leaf tobacco, owing to the dollar shortage, its financing needs will be correspondingly reduced, and in consequence the group's short-term indebtedness is likely to be sub- stantially lower on October 31st, 1952, than the figure shown in the balance-sheet dated October 31st, 1951. Against this back- ground it is obvious that the need for any refinancing to replace temporary borrowings by permanent capital is not urgent. As to arnings prospects, Sir Robert with charac- teristic caution refrained from making any firm forecast, but he went as far as to record his view that, barring unforeseen develop- ments and subject to no new factors in the field of Excess Profits taxation emerging from the Finance Bill, this year's results should show little change from those of 1950-51. On the 32 per cent. dividend Imperial Tobacco £1 Ordinary units quoted around 86s. offer the generous yield of approximately 71 per cent. In my view they are worth inclusion in any investment portfolio.
" Shell " Bonus Surprise
It would appear, too, that City forecasts of a large-scale new financing operation by the " Shell " group are premature. Instead of announcing any issue of new shares for cash the " Shell " Transport and Trading Company has sprung an agreeable surprise by deciding to capitalise £10,902,939 of its share premiums reserve, in order to make a one-for-four scrip bonus distribution to the Ordinary stockholders. There is not the slightest hint in this announcement of any intention to raise new money. The new bonus shares will not participate in the final dividend for 1951, which is due to be announced in May. What that dividend will be is still anybody's guess. On this question the board throw some light in their intimation with the bonus announce- ment that dividend policy will continue to be governed, among other considerations, by the necessity to maintain finances on a sound basis. This seems to me to rule out the possibility of a sharp increase in the final dividend, although there may well be some modest improvement on last year's 71 per cent. For 1950 the total distribution was 121 per cent. tax free. For 1951 I would not pitch hopes higher than 15 per cent. " Shell " £1 Ordinary units, which have latterly been a disappointing market, have rallied on the bonus news to 83s. 9d. They should not be sold.
De Havilland Progress As expected, the De Havilland Aircraft Company reports further substantial pro- gress for the year to September 30th, 1951. Net profits of the group, after providing for all charges except taxation, have risen from £1,071,101 to a new record of £1,773,594, and although the depredations of the Exchequer are reflected in a jump in the taxation provision from £618,024 to £1,117,170 net profits of the group, after providing for tax, &c., are substantially higher at £639,290, against £421,983. On the strength of such figures, the company could easily have declared a sharply increased dividend, but with a much larger capital ranking as a result of last year's scrip bonus and new issue of Ordinary shares for cash they have decided to_pay 7+ per cent. This represents a modest increase, allowing for the larger capital, compared with the previous year's 10 per cent. and must be judged as a reasonable rate of distribution having regard to this company's position in relation to the new Excess Profits Levy. As one of the progressive and expanding companies whose earnings have forged ahead rapidly in recent years De Havilland now stands to suffer severely under the new E.P.L. Fortunately, this additional burden, however unjust, should not weigh too heavily on dividend prospects as the com- pany begins to reap the full benefits of the Comet airliner. At 25s. the £1 Ordinary units are priced to yield 6 per cent. They are still a worth-while holding.
Record Nickel Earnings
Among the soundest investments in the dollar field in recent years have been the Common shares of the International Nickel Company of Canada. In London'the price has moved up from under $40 in 1949 to today's level around $83. In the meantime the company has made immense strides, which have enabled it to raise its dividend rate from $2 a share to $2.60 From the 1951 report just issued one gets an impression of this company's immense financial strength and of rapid developments on the technical side. Last year's net earnings rose from $48,765,849 to $62,875,571, representing $4.17 per Common share, against $3.21 a share for 1950. New records were estab- lished in net sales, dividend, capital expen- ditures and in ore produced. The record output is noteworthy, in that it was achieved in face of the operational difficulties of mining a larger amount of ore while at the same time the scope of the company's underground operations was being expanded to replace loss of open pit yield. In his statement Dr. John F. Thompson, the International Nickel president, sets the end of next year as the target to convert wholly to underground mining. This company has always maintained a strong liquid position and given the maintenance of world demand, which can be assured in the period of re- armament, there should be no difficulty in covering the present rate of dividend on the Common stock. At the present price in London the yield on this dollar equity is now 51 per cent.
Monsanto Chemicals There is nothing in the latest results of Monsanto Chemicals to cause me to revise my view that the 5s. Ordinary shares of this company are a promising industrial holding. Consolidated trading profits rose sharply last year from £1,685,897 to £2,889,330, and although taxation has called for nearly £1,500,000, against less than £700,000 in 1950, consolidated net profit, after tax, is up from £581,536 to £945,976. In announc- ing an ordinary dividend of 221 per cent. the Monsanto diirctors are acting cautiously, even though this represents an improvement on the 55 per cent. paid for 1950 before the Ordinary capital was trebled by a 200 per cent. scrip bonus. This is another of the " growth " companies whose prospects from the equity shareholder's point of view have been made rather less bright as a result of the new Excess Profits Levy. Monsanto 5s. Ordinary shares, which have fallen by several shillings since the beginning of this year, are now quoted at 22s. 6d. to yield 5 per cent. on a well covered dividend. They are not over-valued at this price.
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