FINANCE AND INVESTMENT
By CUSTOS AFTER their remarkable rebound to the pre- dividend freeze level, stock markets appear to have reached a new equilibrium. Clearly, from a buyer's point of view, there is no longer much to go for in the general run of home industrials until we get some indication of the election date. But is it time to sell and wait for a reaction ? I doubt it, even though political hopes are already partially reflected in market values. Fundamentally, the position has not altered very much. Inflation is not yet under control—the T.U.C. abandonment of the wage freeze is an ominous pointer—and rearmament should continue to maintain a high level of industrial activity. The firmness of gilt-edged prices, in ioday's conditions of falling savings, still seems illogical but can be explained on technical grounds. There will doubtless be enough trustee borrowing to absorb available funds around the current level of the gilt-edged market.
Distillers' Expansion While I cannot congratulate the Distillers' Company on the informativeness of its annual report I can congratulate the board on the immense strength of the group's finances. It is clear from the consolidated balance-sheet at March 31st that the group has more than adequate liquid resources for financing outstanding commitments for capital expenditure, which at the balance- sheet date amounted to £2,306,000. Cash stood at £10,322,940 and quoted investments at £4,846,289.
On the revenue side the jump in trading profits from £12,800,000 to £17,900,000 points clearly to a further substantial expan- sion in the group's turnover, although, unfor- tunately, the report does not give any indica- tion as to the relative contribution made to profits and turnover by the various depart- ments. Long past are the days when the Distillers' business was based entirely on the whisky trade. Although profits from the whisky side are doubtless still responsible for a big slice of total earnings, the group now draws a large revenue from its various industrial interests, such as chemicals from petroleum and plastics manufacture. On the strength of earnings of close on 60 per cent. the company recently raised the ordi- nary dividend by 2+ per cent. to 22-1. per cent., on which basis the 4s. ordinary units at 22s. 3d. give a return of 4 per cent. Qn the 211 per cent. dividend, which is the company's ceiling under statutory dividend limitation, the yield is brought down to just over 31 per cent. Even allowing for the strength of the group's finances and the promising long-term outlook for earnings and dividends, the units look to me to be fully priced for the time being.
Cigarette Price Rise It should come as no surprise that the Imperial Tobacco Company ' is raising cigarette prices—the 3s. 6d. 20-packet to 3s. 7d. and the corresponding 10-packet to Is. 9W. For some time past tobacco manu- facturers have made it plain that the steadily rising curve of costs has reduced profit margins to a precarious level. During the last 12 years cigarette prices have been increased seven times, but always through the action of successive Chancellors of the Exchequer, as they have gradually raised the duty from 9s. 6d. to 58s. 2d. .a lb. Few people have realised that the last occasion on which prices were increased by the manu- facturers on account of a rise in costs, other than the duty, was 31 years ago The Imperial Tobacco Company has been unusually successful in combating increas- ing costs by improvements in manufacturing efficiency, a larger admixture of non-dollar tobacco leaf and internal economies. What the increase implies for Imperial Tobacco profits is not altogether clear, but the safest assumption seems to be that profits can now be maintained—unless there is an unex- pectedly sharp falling-off in consumption— at the average level of the last two years. That in turn would imply that the 32 per cent. dividend rate, which has been barely covered by earnings in the last two years, can be held. The interim declaration for the current financial year, which ends in Octo- ber, has already been. maintained at 131 per cent. On the basis of a 32 per cent. total, " Imps " fl ordinary units at a shilling or two over £5 are offering the high yield of 61 per cent. I still hold to my view that they are among the most attractive industrial holdings.
Property Deal Progress Since I referred on August 10th to the first steps in the direction of a deal between Associated London Properties and Mr. Harold Samuel's Land Securities group further material progress has been made. The Associated London board, following the commendable course of keeping their share- holders fully informed of developments, have now announced that they have received pro- posals from Land Securities setting out terms on which Mr. Samuel would be prepared to make a formal offer for the purchase of Associated London's ordinary and con- vertible preference stocks, and a qualified prospective offer for the two classes of 6 per cent. preference stock. Since the voting control of Associated London resides in the convertible preferences and the ordinary shares, it is clearly these two classes of capital which must appeal most strongly to the would-be buyer. One can only infer from the latest statement that Land Securities are less interested in making a cash bid for the two 6 per cent. preference issues. The main questions at this stage are (I) what price will be offered for the convertible preference and ordinary shares, and (2) whether it will be judged sufficient to induce the Associated Land directors to recommend its acceptance. In all these cases of a take- over, 'and especially where property is con- cerned, there is room for considerable differences of opinion about the " right " price. If one takes a line through Associated London's assets position it would appear that even at today's market prices of 25s. 6d. the company's convertible preferences and ordinary shares are very modestly valued. Fixed assets and net current assets at June
24th, 1950, less loan capital, amounted to just over £2,500,000. To this sum must be added the £1,496,241 surplus on revaluation, which has just been announced by the board. This gives a total of over £4,000,000, which, after deducting the two classes of 6 per cent. preference stocks, leaves £3,404,915. This is the figure to which must be applied the £1,000,000 of convertible preference stock and the £400,775 of ordinary stock. The indicated breakup value of both these stocks is just over 50s. per £1 share. Will Land Securities be prepared to bid anything like that price ? I doubt it, and certainly in relation to revenue and dividends a much lower bid would seem to be more appro- priate. Under the dividend freeze the maximum payable on the ordinary stock is 51 per cent. and this, in fact, is the rate now announced by the company, who are also putting another 14- per cent. to dividend reserve, since 7 per cent, would have been paid in the absence of the freeze proposals. It seems to me that a fair compromise between the .assets position and the revenue and dividend potentialities might be ex- pressed in a bid of somewhere around 30s. I still feel, therefore, that in spite of the recent improvement in the market price, holders of the convertible preference and ordinary shares should continue to await events.
Rubber Share Anomaly
The Rubber Growers' Association has done well to submit to the Chancellor of the Exchequer its unanswerable case for exemp- tion from statutory dividend limitation for the rubber plantation industry. Among the many points which the association make are that Sir Stafford Cripps, when dealing with voluntary limitation, agreed that businesses which had suffered directly from the effects of war damage and enemy occupation should not be expected to limit their distributions. The industry has now just as valid a claim for exemption. The R.G.A. cite some striking figures to illustrate the inequalities which will be produced if dividend limitation is applied to rubber companies. Of 105 companies whose financial years ended between January 1st and March 31st, 1951, only 30 had been able to announce their final dividends before Mr. Gaitskell's fateful speech on July 26th. This means that for all the remaining companies the base period for dividend limitation would be from April 1st, 1948, to March 31st, 1950, two years during which rubber production was barely profitable. In consequence, the companies which declared their final dividends before the dividend freeze was announced have a dividend average allowed half as much again as is permitted for the 75 companies which had not been able to declare their payments. How, much weight the R.G.A.'s arguments will carry with Mr. Gaitskell is anybody's guess and, meantime, there is no firm basis for valuing one rubber share against another. As I have pointed out, however, there are some companies fortunate enough to have established a reasonably high dividend ceiling, whose shares offer attractive yields. One is London Asiatic, whose 2s. shares at 4s. 1-td. are yielding 13 per cent. on the ceiling rate of 271 per cent. Another is Harpenden (Selangor) £1 ordinaries now quoted ex-dividend around 19s. 3d. In this case the ceiling rate is 15 per cent.
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