FINANCE AND INVESTMENT By CUSTOS IN face of seasonal as
well as the more basic restraining influences markets are still drifting lower. Gilt-edged prices, which still set the tone for markets as a whole, are wilting under small but persistent selling pressure mostly, it seems, from industrial companies liquidating their holdings to provide necessary cash. But investors as a whole are now standing firm, in my view, justifiably after the heavy falls of the past six months. For long-term investment many of the best stocks are beginning to look cheap.
" Rights " Issue Flood It is symptomatic of the difficult con- ditions now prevailing in the equity markets that issues of new ordinary shares on " rights " terms are meeting with a varying response. In some cases, and especially, of course, where the issue price has been pitched well below market levels, the opera- tions have gone through successfully, but in several others, such as Home & Colonial and Anglo-Portuguese Telephone, under- writers have been called on to take up a substantial proportion of their commitments. Whenever " rights " issue terms are fixed with only a moderate margin in hand over the market price the effect in present con- ditions is immediately to depress the market quotation and in many cases virtually to eliminate the margin. Subsequently, share- holders have little inducement to take up their " rights," even though the shares are now being offered on distinctly attractive terms from the long-term investment stand- point. Among the latest " rights " issues is that being made by the Telegraph Construc- tion and Maintenance Company, who are raising nearly £700,000 of new money to finance a programme of plant replacement and expansion necessitated by the com- pany's rearmament and export drive. In this instance shareholders are also given a one-for-three scrip bonus so that the ex bonus price of the shares now quoted at 29s. 6d. will be just over 22s. Here again the margin over the " rights " issue price of 21s. 6d. is small and it may well be that when the " rights " are dealt in on the market the buyer will be able to pick them up for a few pence. If such an opportunity of buying the new shares free of stamp duty for the equivalent of around 22s. in 'their fully paid form should arise, it should be taken. This company is a leading unit in the cable making trade and has a sound record. The directors forecast that on the enlarged capital the dividend rate will be 71 per cent. so that the shares will be giving a yield of not far short of 7 per cent.
Bonuses and Dividends Scarcely a week passes without bringing its crop of scrip bonuses. General Electric, Spillers, J. Brockhouse and Harrods have all announced substantial capitalisations of reserves. Gone are the days, however, when shareholders could assume that the board's decision to give a scrip bonus was tanta- mount to a promise of a larger dividend distribution. Investors are now beginning to realise that scrip bonuses, especially in present conditions, are merely book-keeping transactions designed to bring capital into better balance with the total resources employed. Only in the case of Spillers, of the four companies which I have named, does the bonus plan automatically confer a real benefit, since in this instance the ordinary shareholders get a one-for-eight allocation of new preference shires. Here it can be safely assumed that it is the board's intention, other things being equal, to main- tain the ordinary dividend rate. The prefer- ence shares, which will have a definite market value of around par, are a free gift which shareholders will be able to sell if they wish on the Stock Exchange.
Harrods Warning In the majority of cases shareholders would do well to keep in mind, especially amid the uncertainties which now envelop the profit earning outlook, that the odds are that the rate of dividend will be automatic- ally adjusted to the increase in capital and that the same amount is likely to be distri: buted. As if to ram home the lesson that a scrip bonus does not necessarily point to better things, Sir Richard Burbidge and his co-directors of Harrods flank their announce- ment of a 50 per cent. capital bonus by a warning that the ordinary stockholders should not rely on even the adjusted rate of dividend being maintained for the current year. Here is a plain indication that Harrods are now feeling the effects of reduced spending and increased overhead charges. On the basis of the current dividend rate of 20 per cent., which was covered by only a- moderate margin, Harrods £1 ordinary units at 44s. are now offering the high yield of 9 per cent. In my view a moderate cut in dividend is discounted at this level. I would not advise holders of these shares to sell.
I.C.I. Outlook Ordinary stockholders in Imperial Chemical Industries will have studied the annual statement of their chairman, Mr. John Rogers, without, one imagines, getting unduly depressed about 1952 prospects. While Mr. Rogers gave a frank warning of increasing competition and referred to the resurgence of German and Japanese rivals, he did not take a gloomy view of the I.C.I's trading prospects. So far this year turnover has been satisfactory and he accepts the challenge of foreign competition with con- fidence. As everyone is aware, the I.C.I. group is well to the front as regards effi- ciency of plant and research, and one need only glance at the balance-sheet to see that thanks to the cautious financial policy in recent years the company has built up a position which will stand it in good stead in any coming test. Last year's transfer of £7 million out of profits has raised the stock replacement reserve to £11 million. To quote the I.C.I. chairman : " If in future years prices do not continue to rise further pro- visions of this kind will be unnecessary and if prices fall it would be quite proper to bring part of this reserve back into profit and loss appropriation account." As regards the group's capital commitments, Mr. Rogers made it plain that the increase in the authorised capital from £95 million to £120 million was a formal step. The board has no present intention of making any new issue even though there is no shortage of important and profitable expansion schemes. On the question of a scrip bonus stock- holders are now told that although no attempt has yet been made to renew the company's unsuccessful application made to the Capital Issues Committee in April, 1951, the idea of capitalising a substantial part of the reserves has not been abandoned. I.C.I. £1 ordinary units have moved within narrow limits in recent weeks, and at 42s. offer the attractive yield of nearly 61 per cent. on a well covered dividend. I still regard them as an attractive industrial holding.
J. & P. Coats Problems Those ordinary stockholders in J. & P. Coats, the Glasgow thread manufacturers, who have disapproved of the board's cautious dividend policy were given short shrift by Mr. Robert Laidlaw in his address at the annual meeting. As one reason for conserving earnings he cited the substantial amount of capital now tied up in heavy stocks. At another he emphasised the vast difference between the original cost of £26 million of the group's fixed assets and a current replacement value estimated at not less than £113 million. What must have impressed stockholders more than these factors on the capital side were Mr. Laid- law's references to a declining volume of trade, increasing competition, and a reduc- tion in profit margins. He went on to stress the very personal danger of a writing down of stocks consequent on falling values of raw cotton and reminded stockholders that the high level of stocks had recently forced the company to curtail output. Altogether, Mr. Laidlaw's review was couched in sombre terms. It has been followed by a drop to 40s. in the company's £1 ordinary units, which are now yielding a trifle over 6 per cent. on the last dividend. Although recovery may turn out to be a slow process, I doubt whether this sound equity should now be sold.
Metal Share Yield A year ago I discussed the merits of the £1 shares of the Amalgamated Metal Cor- poration. The favourable view 1,, then took is confirmed by the results now announced for 1951. Group earnings of this metal trading concern, who have also a large stake in rubber trading, have risen from £252,996 to £1,030,548. Even this comparison does not do full justice to the increase in gross earnings in that the tax charge was £1,066,343 against £339,881. The directors remind shareholders that when the group figures for 1950 were issued reference was made to the loss incurred by a major subsidiary through the incidence of commodity contracts maturing in 1950 and to the profits of corre- sponding contracts which will mature in 1951. It is now pointed out that these con- tracts were implemented last year and that the profits on them amounted to approxi- mately £470,000 before tax. They therefore account for part but by no means all of the spectacular rise in last year's earnings. The ordinary dividend is cautiously raised by 1 per cent. to 8 per cent. The £1 ordinary units which have recently been quoted around 16s. 6d. have moved up to 18s. 9d. At this level yielding nearly 81 per cent. they still seem to me to have speculative attractions.
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