WISE INVESTMENT

THE way of investors and speculators is being made a difficult one to tread. After the gilt-edged slump, a gold share collapse, now followed by a commodity slump and tax shock, with a host of good shares rushing downhill in the most foolish Gadarene style. Only the shipping group, which, one would have thought, depended pretty closely on the course of com- modity prices, has held firm, presumably because there is still some leeway to be made up in adjusting values to the much- improved level of freight rates. Speculative investors who have not lost their heads must be scratching them in a con- siderable state of bewilderment. If, when commodity prices boomed, most industrial shares were lowered through fears of higher costs, why do they not rise when commodity prices fall ? Again, is the commodity collapse genuine or merely a technical shake-out of weak " bull " speculators ?

My own feeling is that there will be no real investment confidence in markets until there is much more stability in the commodity situation. I cannot imagine any investment trust manager making any substantial new purchases just yet simply because there is no reliable basis on which to estimate earnings. At the same time, I see no reason why shares should he jettisoned at current prices, the falls having been so severe as to discount very adequately the worst that is likely to happen, including the unexpected tax on " excess " profits. Holders of rubber and base metal shares should certainly hold on for a recovery, and the prospects of home industry and of international trade are surely good enough to justify the current prices of a wide range of industrial ordinary shares. Once the commodity price level becomes less of a see-saw and acquires a reasonable stability, and the incidence of the new profit tax can be more accurately gauged, the market will not lack buyers and share prices will quickly respond.

FIVE PER CENT. YIELDS Subject, of course, to the qualification I made last week, that only reasonable and not gilt-edged security can be bought to give a yield of 5 per cent., the following is another group of preference shares which can be recommended for income purposes : No. of times Current dividend price.

covered. s. d.

Cable and Wireless 51% Cumulative Yield 0, £ s. d.

£100 Pref.

I 102

o*

5 7 6

Pease and Partners 5% £1 Cumu-

lative Preference .. .. 3 19 0 5 6 Yorkshire Amalgamated Collieries 5%

Li Cum. Preference ..

21 0 4 15 3

Powell Duffryn 41% Li Cum. Pref. . .

3

19

3 5 4 0 * Net price after allowing for deduction_of arrears of dividend.

All the four companies whose shares I have selected are now increasing their earnings and have a satisfactory balance- sheet. The cover in each case should be -strengthened as a result of higher profits during the current year. The average yield on this group is approximately Ls 3s. 6d. per cent.

CABLE DIVIDEND FORECAST

The board's explanation of the Cable and Wireless recon- struction scheme underlines my reference to the merits of the Ordinary stock as a recovery investment. When the directors of a company dependent on the course of international trade and subject to keen foreign competition forecast a 1937 divi- dend of 4 per cent. when onty 31 months have passed, I feel that -they are budgeting with a comfortable margin for contin- gencies. The predicted 4 per cent. is probably a minimum rather than a maximum and, in any event, should be covered by much larger earnings. Taking the published traffic index numbers, the average for the first quarter of 1937 is nearly 20 per cent. higher than for the corresponding quarter of last year, and the trend is decidedly upward.

With a 4 per cent. dividend in prospect Cable and Wireless " A-" Ordinary stock at 284, the equivalent of 19s. in -the k on its reorganised basis, offers a potential yield of just under 41 per cent., not perhaps an exciting return in itself, but attractive in the light of the further recovery chances. If, as seems likely, the traffic barometer is just beginning' to rise steeply, the cable combine will earn large profits in relation to its drastically scaled-down capital. The profits are not likely, however, to reach a level equivalent to 6 per cent. on the total capital in the sense implied in the Chancellor's new excess tax regulations, so that here is an equity which should- be free to blossom out immune- from the blight of the new profits tax.

* * * A CHEAP RUBBER SHARE The setback in rubber from is. 2d. to iid. a pound is dis- appointing to short-term speculators but should not worry rubber shareholders. Even on the basis of an average selling price of sod. most of the companies can earn profits sufficient to justify at least a moderate improvement on current share values, and I shall not be surprised to see the commodity recross the Is. level before long. The American consumption figures are excellent and the stock position becomes healthier week by week. Holders of rubber shares should certainly not sell at this juncture, and might even consider fresh purchases at the lower prices now prevailing.

The 2s. shares of Lubok Rubber Estates, now quoted at 4s. 'Id., look very moderately priced in relation to the 1936 dividend of ro per cent. Profits rose last year from £4,725 to £7,916, and the net selling price obtained was about 74d. a pound, against costs of roughly 4d. For 1937 the company's standard assessment is 924,000 lb., indicating an exportable crop of 775,000 lb., or some 200,000 lb. more than in 1936. On the basis of an average selling price of iod., and allowing for an increase in costs from 4d. to 41d., which should be adequate to cover higher labour costs, I estimate that earnings on the capital should be at least 25 per cent. As the financial position is satisfactory, it should be possible to raise the divi- dend conservatively from to to 171 per cent., in which event the shares would command a price appreciably higher than today's quotation.

* * * *

Venturers' Corner A shipping company which has been rather overlooked in the recent buying movement is the old-established Irrawaddy Flotilla. Operating a fleet of steam and motor vessels on the rivers of Burma, it depends essentially on activity in the timber, rice and tin industries. Movements in all these commodities, reflecting the recent improvement in selling prices, have latterly increased, and the company has raised its dividend for 1936 from 6 to 7.1 per cent., tax free. Under shrewd Scottish management, Irrawaddy Flotilla has an inspiring dividend record, the. annual distribution never having fallen below 6 per cent. tax free during the depression.

The balance-sheet is immensely strong. Apart from specific reserves of £.5o9,000, there is a reserve account of £143,000 and het liquid assets stand at just under £2,000,000. An impressive figure is the low value of £693,000 at which the company carries its fleet in the books. Year by year the book figure has been drastically cut down, with the result that the fleet is now carried at a value representing less than one-third- of the issued capital. On the other hand, the cash and investments together amount to almost the whole of the capital, an extraordinary position. On the basis of the last

dividend the units, at 39s., yield nearly 4 per cent. tax free, or 5 per cent. gross, a satisfactory return in the light of the strong finances and further recovery prospects. In the pre-depression years considerably higher rates of dividend were paid, shareholders receiving no per cent. tax free both in 1928 and 1929.

CUSTOS.

(Readers' enquiries, or requests for advi:e regarding particular shares, will be answered periodically as space permits. Cor- respondents who do not desire their names, 'to' should append initials or a pseudonym to their question.). _