FINANCE AND INVESTMENT By CUSTOS UNDER the inexorable pressure of
events the optimism which produced the recent rally in markets has now evaporated. As I feared, the fall in exports, the heavy burden of taxation in buyers' markets and the threat of fresh pressure on the pound have again got the whip-hand as investment factors and buying has dried up. Even gilt-edged stocks, which a fortnight ago were being steadily supported, have temporarily gone out of favour and Mr. Butler's substantial conces- sions on the Excess Profits Levy have left the equity markets quite cold. The plain truth is that in present conditions any increase in the total tax burden which industry has to bear is economically unjusti- fied. What businesses require is an environ- ment in which they can " plough back " on a much larger scale as well as give a reasonable reward to the suppliers of risk capital. As things stand, despite the temper- ing of the wind to the shorn lambs 'which the Chancellor, under pressure, has now seen fit to set in motion, industry is being steadily denuded of its capital resources. Against this sort of background it seems premature to look for any real improvement in security prices, with fixed-interest stocks or equity shares.
" Shell " Group Results Confident expectations in the City that the Royal Dutch-Shell oil group would achieve a new peak of earnings in 1951 are now amply fulfilled. Net income of the group rose last year from £50,994,529 to £66,216,204. Moreover, the latest figure has been struck after charging £22,053,608, against £7,059,696, for additional deprecia- tion. Since taxation and other items have also been deducted before arriving at the net income figure it is a fair inference that last year's gross profits increased by some- thing between £30 million and £35 million. These striking results reflect very clearly the favourable conditions, as regards volume and selling prices, which prevailed in 1951. With its world-wide interests in oil produc- tion and distribution, and its huge invest- ments in the prosperous tanker trade, this giant organisation stood to benefit in every section of its activities. Following their traditionally cautious distribution policy, which is obviously appropriate in view of the group's extensive capital commitments, the directors have decided to retain over £47 million out of the year's profits in the business. There can be no quarrel, there- fore, with the modest increase from 12i per cent. tax free to 15 per cent. tax free in the distribution announced by " Shell " Trans- port and Trading, or with the increase from 12 per cent. to 13 per cent. in the dividend of Royal Dutch. Net income of " Shell " Transport and Trading is shown as only moderately higher at £7,399,129, against £6,438,477, after charging U.K. taxation at £6,986,865, against £5,733,433. These figures do not, of course, provide the measure of last year's increase in earnings, the key to which is given in the group results. Taking the group figures, it appears that Shell's 15 per cent. tax-free dividend was covered about four times over. After the annual meeting called for June 27th " Shell " Ordinary stockholders will receive a one- for-four capital bonus, and I think it is a reasonable assumption that on this larger capital stockholders may receive 121 per cent. tax free for 1952. Following the announcement of last year's excellent results " Shell " £1 Ordinary units have shown a modest relapse at 93s. 9d. On the 15 per cent. tax-free dividend 'the yield offered is about 6 per cent. Bearing in mind the group's leading position in the oil industry, its efficient management and strong finances, I regard " Shell " Ordinary units as a sound long-term investment at the present price.
Dunlop Rubber Record Following the maintenance of the Ordinary dividend at 15 per cent., supplemented by a 2} per cent. cash bonus, the full accounts of the Dunlop Rubber Company disclose a further sharp expansion in turnover, flanked by a reduction in the profit margin. Aggre- gate sales of the group rose last year from £197 million to a record of £284 million. Part of this rise of £87 million was due to higher price levels, but the directors empha-' sise that there was a significant increase in the volume of goods sold. The expansion appears also to have been broadly based, in that a fresh increase in the export and over- seas activities of the group resulted in this section providing more than one-half of last year's total profit. Against these figures the increase of less than £300,000 to £17,869,124 in gross trading profit looks small. It reflects a reduction in the ratio of profit to turnover. Last year's profit ratio, after taxation, fell from 3.4 per cent. to 2.2 per cent. As taxation was also heavier the anomalous position has resulted that, in spite of last year's tremendous growth of turnover, the net profit available for dis- posal was down from £5,062,863 to £4,607,413. ' Here is fresh evidence, if any were needed, of the gradual erosion of industrial capital which is now going on owing to heavy taxation and high replace- ment costs. Appropriately, the Dunlop directors call attention to the problems now facing the group through the high cost of replacement, and especially to the amount additional to depreciation on original cost which it is now estimated is required to replace freehold buildings and plant in Britain. This explains the decision to transfer £2,960,000 from the parent com- pany's general reserve to a special account, raising the amount provided for this pur- pose to £3,430,000. As expected, the growth of business and higher prices are reflected in a sharp expansion in stocks, which appear in the balance-sheet at a new peak of £61,246,077, against £40,015,731 at the end of 1950. Cash has been reduced by .over £3 million to £8,740,950, and the group's indebtedness on bills and bank loans is £13,500,000 up at £20,400,000. One might be tempted, in the light of these figures, to draw the conclusion that some funding operation might be launched to reduce this temporary indebtedness at an early date. It is important to remember, however, that with lower prices and the probability of a moderate reduction in turn- over this year the need for such a step may . well be diminished. Meantime; Dunlop £1" Ordinary units at 50s. 6d. are priced to yield about 7 per cent. on a well covered dividend. In present circumstances I regard them as fairly valued. J. & P. Coats Problems Ordinary stockholders ofJ. & P. Coats, the Pd.sley thread manufacturers, must by now be despairing of ever getting any increase in dividend. During the period of steadily rising profits between 1946 and 1950 the directors, with characteristic Scot- tish caution, merely maintained the dividend at 12i per cent. They are now doing so again for 1951, but on this occasion the group earnings show a slight fall. Group profit was down from £12,779,717 to £12,033,180, but as taxation has called for £5,170,617, against £3,234,986, the group net profit, after tax, was heavily down from £9,544,731 to £6,862,563. The directors explain that last year a higher proportion of the group's profits was received from abroad by the parent company. Conse- quently, the charge for U.K. taxation was higher. In the parent company's accounts, however, net profit was up last year from £2,822,888 to £4,658,058. This was because, contrary to their usual practice, J. & P. Coats have brought a much larger propor- tion of the group profits into the parent company's accounts. In view of the lower group earnings, and remembering the board's policy of meeting as far as possible additional working capital requirements from the group's own resources, one cannot be sur- prised at the mere maintenance of the 14 per cent. dividend. A new factor now making for caution is the stock position. With the preliminary figures comes a warning from the board that substantial falls in raw material prices, which have taken place since December 31st, may necessitate appreciable writing down in the 1952 accounts. Since stocks at the end of 1950 were shown at a book figure of nearly £40 million it is clear enough that writing down may involve quite substantial sums. J. & P. Coats £1 Ordinary units are now quoted around 42s. 6d. to yield not far short of 6 per cent. It is a measure of the change in market atmosphere that these units touched 70s. at one time last year. At the present level they are good value for money for the long-term investor.
Unilever Dividend Decision Another " blue chip " industrial equity which can now be bought to yield a full 6 per cent. is the £1 Ordinary of Unilever, Ltd., the margarine and soap combine. This group has done well to achieve a further increase last year over the peak trading profits earned in 1950. The com- bined trading result of the group's opera- tions throughout the world was up from £52,181,298 to £53,933,152, after charging £5,115,037, against £4,943,233, for reserve for replacement of fixed assets.. Here again it is the old story of heavy taxation reducing net profits. Last year's taxation charge for the group was up from £28,459,366 to £31,209,664, reducing consolidated net profit, after tax, from £19,226,875 to £18,837,651. This net figure for 1951 has been arrived at after setting aside £3 million, against £2,629,699, to reserves against stock values. On the latest figure there is still ample cover behind the Ordinary dividend, which is maintained at the level of 13i per cent. to which it was raised from 10 per cent. a year ago. The £1 Ordinary units are now quoted around 44s. 6d., and in my view the 6 per cent. yield offered makes them a reasonable industrial holding. But it may be as well to await the chairman's review of trading prospects and the stock position before making a purchase.
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