FINANCE AND INVESTMENT
By CUSTOS
AFTER a fortnight's slow but steady ascent, the gilt-edged market has paused for breath, and some stocks have slipped back a little. The advance revealed the pivotal influence of this section on other high-grade investment stocks, and some of the leading equities have lately shown more vitality. In face of the continued short- fall in " small " savings, the uninspiring April exports and the lack of encouraging general news, the brighter tendency of the non-speculative groups has been noteworthy. There have been suggestions that the market was being conditioned for a fresh spate of borrowing—the East African High Commission 34 per cent. stock 1966-8 has been issued at 99f since I last wrote, and the first slice of British Coal Stock is expected in mid-June—but There has been no obvious sign of official stimulation. In part, no doubt, the better market sentiment reflected hopes of a further improve- ment in the balance of payments, as a result of the higher prices now being obtained for sterling area commodities. These higher prices are the outward and visible signs of the new wave of pros- perity in the United States. Dearer raw materials, of course, are not an unalloyed boon. They will raise the cost of production of British goods, but the rise will not necessarily check exports, since manufacturers overseas will be similarly handicapped.
Easing the Dollar Problem More important is the fact that substantially higher prices of rubber, copper, wool and cocoa will earn more foreign currency for the sterling area and result in the remittance of higher profits to London. On balance, dearer sterling commodities should ease the dollar problem and thus aid market sentiment. But there is one potential market snag. The rise in commodity values is swelling the cost of carrying stocks of raw materials and finished goods, and is thus absorbing funds which might otherwise have been invested in gilt-edged. I referred last week to this burden of financing stocks when I commented on the accounts of Imperial Chemical industries. The growing burden on manufacturers could be eased by a further expansion of bank advances, but the problem is hydra-headed, and a facile solution might give rise to a rich crop of economic difficulties. We shall hear more of this problem in future if the upward trend in commodities persists. It may not have any perceptible influence on the gilt-edged market just yet, but it would be unwise to ignore the potential danger.
Shell Dividend Unchanged
Hopes that Shell Transport would emulate Burmah Oil's example by putting up its dividend were never really strong, for Shell is in the middle of a costly expansion programme which will absorb many more millions of its vast liquid resources. After provision for depreciation and taxes, the net profit of the Royal Dutch-Shell group for 1949 is up from £33,227,000 to £35,732,000, of which £16,000,000 is put to general reserve, £7,250,000 is reserved against fluctuations in raw material prices and currencies, and £12,300,000 —just over one-third of the profit—is appropriated for group divi- dends. Shell's own net profit is £451,429 higher at £4,828,919. Of this amount £1,180,037 goes to swell the reserves and the undis- tributed surplus, and the Ordinary dividend is maintained at 74 per cent. free of tax. Earnings of the Shell company alone are just over 10 per cent. net on the Ordinary stock, but the consolidated earnings appropriate to Shell Ordinary would appear to be not far short of 30 per cent. net. If allowance is made for the final divi- dend of Is. net in the price, the gross yield on Shell Ordinary at 66s. 3d. is £4 3s. 6d. per cent. This is not over-generous as equity yields go nowadays, but the impressive earnings cover gives the stock a high investment-rating.
Taxation Relief for Burmah Oil?
Burmah Oil's final dividend of 124 per cent. brings the total payment up to the basic rate of 15 per cent. paid before the Japanese invasion of Burma. It can, therefore, be amply justified. Net profits of the group, after a heavier provision for taxation, are about 30 per cent. higher at £2,681,942, but this includes £578,000 exceptional credits in respect of previous years. General reserve is augmented by £1,350,000, and the forward balance is £33,680 higher at £547,851. Excluding the exceptional credits, earnings on the Ordinary stock are slightly over 25 per cent. At 67s. 6d., including ls. 44d. net dividend, the units yield £4 10s. 9d. per cent. on the 15 per cent. dividend. This is a reasonable. return, but the main strength of Burmah Oil lies in its enormous holdings of Anglo-Iranian and Shell, which are worth over £42,000,000 at current prices. I estimate that these holdings, together with Government securities and other net liquid assets, amount to about 65s. for every £1 of Burmah Ordinary stock, after deducting the Preference capital. If allowance is made for other assets which bring in a gross trading profit of over £4,000,000, the break-up value of the Ordinary stock is clearly well above the current price.
Rich Men's Stocks In those far-off days before the war there was a select group of equities which came to be known as rich men's stocks. At one time this group included British EleCtric Traction, Carreras and Marks & Spencer. Their activities were diverse, but they had sore characteristics in common—notably direction of a high order, a progressive expansion of trade and earnings, an ultra-conservative dividend policy and a pleasant habit of distributing free bonus shares without reducing the rate of dividend. Dividend yields on these stocks were low ; but holders, if they wished, could augment their income by selling some or all of the bonus shares. By doing so they reduced their proportion of the equity, but not necessarily the value of their investment, since it frequently happened in the course of a year that the price of the shares fully regained the bonus deduction.
Although the ban on bonus issues was relaxed some time ago, and later modified to permit a maximum capital increase of up to £50,000 a year, some of the companies which distributed share bonuses . before the war have not resumed the practice. One of those which have revived the bonus habit is Marks & Spencer, whose latest net profits show a rise of about 15 per cent. to £2,121,102—a remarkable advance, having regard to the competitive nature of the industry. The total dividend on the Ordinary and "A" Ordinary shares is maintained at 60 per cent. for the year, and a bonus of one new share is being distributed for every 41 held, compared with one for every 43 a year ago. The Preference and Ordinary dividends absorb less than two-fifths of the net profit, the balance being retained for further development. At 79s. the "A" Ordinary 5s. shares yield only £3 16s. Od. per cent, but the share bonus is worth about Is. 9d. a share, or slightly more than the net value of the 3s. gross dividend. The price of the shares will, of course, be reduced when they are marked ex dividend and bonus ; but the fact that earnings increased by 15 per cent., compared with the increase of only 21 per cent. in the capital, suggests that the company may be able to maintain both the bonus habit and the current rate of dividend for some time.
Eastern Merchants' Equity
Some of the troops who soldiered in the East in wartime may remember the stores of Whiteaway Laidlaw in many of the principal towns. This company runs a drapery and general store business with branches in India, Ceylon, Malaya, Hong Kong, Kenya, the Argentine and elsewhere. In many of these places general trade has improved in recent months. Tea and rubber planters in Ceylon and India, rubber estates in Malaya and coffee growers in Kenya should all have been helped by higher prices for their products, though in the case of rubber the recovery did not start until the pound was devalued. For the year to February 28, 1949, earnings of 22 per cent. were shown on the Ordinary £1 shares of Whiteaway Laidlaw, and a 5 per cent. dividend was paid. At the price of around 12s., which is virtually the lowest for five years, the yield is £8 6s. 8d. per cent. The results for the year to February 28, 1950, should be available about the end of June. Shares of this type are not free from risk in present conditions, for even when trading is good in certain areas, currency restrictions may prevent the transfer of profits. For example, a loss of £47,736 on net current assets in the Argentine owing to exchange deprecia- tion was charged in the accounts issued a year ago. I doubt very much if any profits will be remitted from the Argentine in the present state of that country. On the other hand, the branches in Malaya, Hong Kong, Ceylon and Kenya should have fared reason- ably well, particularly since the pound was devalued last September. The current high prices for rubber, tea and coffee suggest that the shares may be an interesting lock-up purchase at the low price now ruling. It seems a little odd that the quotation should not so tar have reflected the substantial rises in many rubber and tea shares.
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