FINANCE AND INVESTMENT
By CUSTOS STOCK markets have run true to recent form this week, with gilt-edged firm ; most industrial, rearmament and base metal shares easier ; and gold-uranium shares strong. Expectations of a large gilt-edged issue, mentioned here last week, have quickly been fulfilled by the news of the issue of £125 million British Electricity 4k per cent. Guaranteed Stock 1974-79 at par. After a brief reaction on the announce- ment gilt-edged soon resumed their rise. The strength of this market suggests official support. Another interesting new issue is a £3,000,000 Tate & Lyle 41 per cent. Deben- ture Stock 1968-78 at 981. While the terms are more favourable to the borrower than those of recent Debenture issues, it should be noted that the market in good- class debentures has improved perceptibly of late and that this issue enjoys first-class security. The stock should appeal to investors who want a better return than can be got on gilt-edged.
Vickers and Cammell La d Higher profits and dividends are an- nounced by Vickers and Cammell Laird, which have certain interests in common. Net group profit of Vickers-after providing for a net loss of £301,820 on sales of invest- ments and after deducting tax and outside shareholders' interests-has risen from £2,072,872 to £2,844,638, and the dividend for the year is 21 per cent. higher at 15 per cent. Net assets total £61,169,018, of which about 70 per cent. consists of net liquid assets. The £1 Ordinaries are now about 47s. 6d., and if allowance is made for the net dividend of ls. 41d. in the price, they offer a well-covered yield of 64 per cent. Prima facie they seem good value for tnoney, but the company's big rearmament interests make the price of the stock some- what vulnerable to the current talk of peace, and it might be wise to postpone a purchase. Cammell Laird's net profit is £191,677 higher at £655,227 ; the dividend is 1 per cent. higher at 15 per cent. ; and there is also a 2 per cent. tax-free bonus. On the dividend alone the 5s. Ordinary units, now around 13s. 311., yield 51 per cent. If the bonus is included-and earnings cover the total distribution almost twice-the gross return is over 7 per cent. Defence orders are relatively less important to Cammell Laird than to Vickers, and the shipbuilding side of the business should benefit from the reintroduction of initial depreciation allow- ances. I think Cammells are worth keeping, and I should not oppose a purchase.
Union-Castle's Good Yield It is not uncommon nowadays for a higher dividend to be followed by a sharp drop in the shares. The latest instance is the Union-Castle Ordinary dividend of 74 per cent. for 1952, which is equal to 15 per cent., against 124 per cent., on the capital before it was doubled by a share bonus last June. The shares fell 3s. 9d. to 22s. 101d. on the announcement, but later rallied to 23s. 3d. If the net dividend is deducted from the price, the yield comes out at just over 61 per cent., which seems generous. It is true that the group net profit is £450,000 down at £1,333,734-the lowest figure since 1946-but even on the reduced earnings the 71 per cent. payment is covered more than five times. The decline in profit is'attributed entirely to increased operating costs, which suggests that gross operating revenue was fully maintained. Stockholders will await the annual review with interest to see if there has been any recent check to the rise in running costs. If commodity prices fall further, the cost of oil for the Union-Castle fleet should come down ; while the financial problem of replacing tonnage should be aided by the reintroduction of initial depreciation allow- ances. Union-Castle has now, I believe, fully made good all the wartime tonnage losses, yet its finances remain impressively strong. On the basis of book values the net asset value of the Ordinary units now exceeds 60s. The units are thus selling at less than 40 per cent. of the break-up value, which is probably much below the market value of the assets. From the earnings angle the units are valued at less than three times the 1952 profits. My impression is that they are worth buying around 23s. 3d.
Gold Mining Finance Shares While there are many problems to be solved before relations with Russia can be restored even to the pre-1939 basis, the markets seem likely to go on discounting the possibilities of peace so long as the proffered olive branches are not transformed into clubs. On the assumption that large-scale switches to peace-time products would cause economic dislocation for a time, there is much to be said for moderate hedging purchases of good-class gold shares. The safest investments in this field are probably the shares of the leading finance houses: One of the best-known, Consolidated Gold Fields, has recently issued new Ordinary £1 shares at 48s., and these can be bought at about 49s. to yield 61 per cent. on the current 15 per cent, dividend basis. The new issue is relatively small-it increases the capital by only 14 per cent.-and the past year's dividend was paid out of group earnings of 50 per cent. Consolidated Gold Fields is the parent company of many famous mines including the fabulously rich West Drie- fontein, as well as West Witwatersrand, Doornfontein, Libanon and Venterspost. It also has large holdings, inter alia, in Blyvoor, Luipaards Vlei, Vogelstruisbult and other gold-uranium mines, together with important gold mining interests in West Africa, Australia, Canada and Rho- desia. At one time in 1946 Gold Fields shares rose to nearly £5, though the divi- dend at that time was only 121 per cent. and group earnings were appreciably lower than they are now.
Rugby Cement Options When interest in markets is inclined to flag anomalies often crop up in share prices. A case in point just now is provided by the
discrepancy between the 5s. Ordinary shares of the Rugby Portland Cement Company and the options issued last summer in con- nection with the company's new loan stock. Rugby 5s. Ordinaries are now around 26s. 3d. ex the recent dividend of 20 per cent. less tax and a 5 per cent. tax-free distribution, which together amount to about 10d. a share net. The price of the options, however, is only about 13s. These certificates confer on holders the right to subscribe at any time between November 1st and December 15th of this year for one new Ordinary share at 10s. 6d. each, so that, in effect, a buyer at 13s. puts himself in a position to acquire Ordinaries at 23s. 6d. Broker's commission and transfer stamp duty are both smaller on the options than on the shares. The point arises whether Rugby Cement Ordinaries, whether bought directly or via the options, are a good pur- chase. In my view they are. Allowing for the tax-free distribution out of capital reserves, which can now be regarded as a regular distribution; the yield is about 51 per cent. on a dividend covered by a very ample margin. Moreover, the group's expansion schemes in Australia and Trinidad have still to bear fruit. Rugby Cement, with its alert management and strongly entrenched posi- tion in the trade, seems to me to be a good proposition, whether or not peace should call for some adjustment in our productive efforts. With the present wide discrepancy between prices holders of the Ordinary shares might well switch into the options. For those who wish to acquire a new inter- est in the company the options are clearly the cheaper medium.
Preferences Preferred
When the market outlook is clouded with uncertainty many investors show a prefer- ence for Loan stocks and Preference and Preferred shares. For those who are seeking fairly high yielding securities in this field, the following are worth considering-:-
Rand Selection 51 per cent. Approx. Price Gross Yield Per cent.
Unsecured Notes 1963-72 90 6.3 (a) De Beers 40 per cent. Pref.
(50s.) .. . . 141 6.9 Illingworth Morris 61 per cent. Cum. Pref. £1 . . 19s. 6d. 6.6
(a) Yield to final redemption at par in 1972.
Interest on the Rand Selection Notes is covered five times by average earnings for the past five years and six times by profits for the past two years. The company has large holdings in leading gold mines, and the directors expect that dividend income from these sources will rise substantially. The De Beers Preference dividend was covered 121 times by earnings in 1951. While the diamond industry is subject to ups and downs, I find it hard to envisage a decline in profits drastic enough to uncover the dividend on these shares. The shares rank for repayment at £20 each in the event of liquidation. Illingworth Morris Preference rank after £1,431,850 of Debenture and Loan stocks. Earnings for the year to September 30th, 1952-a most difficult period for the worsted spinning trade- showed a sharp drop, but the net dividend of £35,750 on these shares was apparently covered by an earnings margin of £114,000
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