FINANCE AND INVESTMENT
By CUSTOS
NOT since devaluation have stock markets been given such a powerful stimulus as they have received from the announcement of the election date. The immediate resurgence of hope in the hearts of investors gave rise, as might have been expected', to a sharp upward revision of equity share prices, with some quite spectacular gains in those groups, such as rubber shares, which stood to be worst hit by the Gaitskell dividend freeze. This buying movement was the natural out- come of the view, widely and confidently held by investors, that the election odds are strongly in favour of a Conservative victory and that such a change of Government would mean, in general, a fairer deal for the ordinary shareholder and, in particular, the death-knell of statutory dividend limitation. So long as the Conservatives remain favonrites I cannot see much risk of any serious setback in share prices, although I am equally not surprised that, after its first fine careless rapture, the market is now behaving cautiously.
Need for Caution
Any sober assessment of the investment outlook—ignoring the possibility that the election may go the wrong way—must recog- nise that whatever Government is in favour will have to face some awkward 'problems. Difficulties in the field of materials, fuel and transport cannot be solved quickly, nor is it going to be easy to get the balance of pay- ments, now badly in deficit against the dollar, on to a sound footing again. Some restric- tion of imports looks unavoidable and one can only hope that there will be no cuts in imported raw materials for British industry. These are specific problems quite apart from anything which a Conservative Government might do to combat inflation and put the British economy back on to a sounder basis. The City hopes, although it does not pitch its expectations very high, that part at least of the inflationary problem will be solved by the elimination of non-essential Govern- ment spending. It is also mindful of the fact, however, that the Conservative Party has on more than one occasion expressed itself as favouring a more " realistic " money policy. This obviously implies some willing- ness to use the interest rate weapon as a means of damping down demand, and one should be prepared, I imagine, for a stiffen- ing of interest rates, at least for short-term money. Such an expectation has already found reflection in the weakness of short- dated securities in the gilt-edged market, but so far the strengthening of investment con- fidence has served to safeguard long-dated gilt-edged stocks from any severe fall. Another factor which has helped gilt-edged is the prospect that under a Conservative regime the steel industry will be returned to private ownership. While nobody in the City seems to have any clear-cut ideas about the financial mechanics of such an un- scrambling plan, it is assumed that it will involve some reduction in the amount of Steel stock outstanding. Similarly, the removal of the fear of any further experi- ments in nationalisation would automatically reduce the risk of further large additions to the supply of gilt-edged securities. Barring any grave developments in the- international political -situation, the chances seem to be,
• therefore, that gilt-edged prices will hold somewhere around current levels.
Some Good Industrials
What of industrial Ordinary shares ? Although they may well yield some of the ground gained in last week's __enthusiastic markets, I doubt whether they will react sufficiently to justify present holders in selling with a view to repurchasing later on. Most of this week's setback has been due to profit-taking by short-term operators and the usual marking-down - by Jobbers in the absence of buying. In my view the oppor- tunity should be taken on dull days between now and the election to pick up sound industrial equities and especially those whose current dividend rates are covered by a large margin of earnings. A brief list of such shares would include Courtaulds, now around 49s. 9d., paying 11+ per cent, and earning over 60 per cent., Imperial Chemical at 51s. 6d., paying 12 per cent, out of earn- ings of 46 per cent., Austin Motor at 34s. 9d., paying 35 per cent, and earning 235 per cent., and Lever Bros. quoted at 55s. with a 13+ per cent dividend covered by 44 per cent. earnings. This list could easily be extended to include a wide range of rubber and b,ase metal shares, where the dividend possibili- ties, ignoring the threatened dividend freeze, are -even more alluring. As -I have em- phasised, however, the economic outlook is not such as to suggest that boards of directors, even under a Conservative regime, are likely to indulge in an orgy of dividend raising. What I have in mind is the proba- bility of moderate dividend increases, if and when the dividend freeze is ended. Judged on earnings and asset values these shares should all have scope for capital apprecia- tion in a more favourable political environ- ment. I doubt whether prices will present a much more favourable opportunity than is available just now.
"Imps" Refinancing
Some stockholders in the Imperial Tobacco Company appear to have been taken by surprise by the board's decision to seek their approval for an increase in the group's borrowing powers. Admittedly, the power sought, which will enable Sir Robert Sinclair and his cgmdirsgors to borrow up to £137,500,000, or £55 million more than the p sent limit, involves very large firures.
4e ey have to be cqmidergd, hpwever, in re ation to, ..the scale Of the group's activities 'ad, in particular, to - the huge increase in stocks at high prices, which is putting an increasing strain on financial resources. Srockholders will recall that only last October this situation was relieved to some extent by the issue of £20 million of 4 per
cent. Unsecured Loan Stock, which was heavily over-subscribed, but in the last balance-sheet dated October 31, 1950, it was plain that after allowing for the proceeds of this issue the group would still remain heavily indebted to the banks. In more normal circumstances the Imperial Tobacco board would Obviously follow the course of making a substantial issue of new Preference shares, or new Ordinary shares, on attractive terms. Unfortunately, with Profits Tax at its present level and with the Capital Issues Committee keeping a careful watch on the bonus element in any new share issues the normal method of financing loses its attrac- tions. In the market it is thought unlikely that the company will embark on any new financing. in the immediate future. When the time is Judged ripe the Impsrial Tobacco directors may see fit to make a further issue of loan stock. Alternatively, if the operation can be delayed for several months, financial conditions under a new political regime might enable this company to make a large issue of Ordinary capital on bonus terms. I see no reason to alter my view that " Imps " £1 Ordinary units now quoted a shilling or two over £5, offering a yield of just over 6 per cent., are a good industrial holding.
General Theatre Attractions Just over a year ago I outlined the merits of the 6s. 8d. Preferred Ordinary shares of the General Theatre Corporation. They were then quoted around 9s. 9d, and the company was paying a 15 per cent. dividend. Today these shares are standing around 10s. 3d. and the dividend has just been increased modestly from 15 per cent. to 16 1-5 per cent., this payment, equivalent to about 7d. net per share, still being included in the price. It seems to me that in the light of the latest results these shares, offering a yield of over 10+ per cent., are under-valued. • The accounts show that for the year to June 23 this company, which owns or controls 44 cinema theatres itt London and the Pro- vinces, increased its trading profits from £162,223 to £207,175. After charging depre- ciation and taxation the net balance rose from £34,148 to £56,534, raising the earnings on the Preferred Ordinary shares to over 50 per cent., or about three times the dividend rate. Since cinema attendances, as reported by Mr. J. Arthur Rank in his state- ment to Odeon shareholders, remained relatively stable it is a fair inference that this improvement in profits reflects substantial administrative economies. Assuming, as seems reasonable, that profits can be held around the present level, there would seem to be a strong likelihood, if the dividend freeze is ended, that the payment to Pre- ferred Ordinary shareholders, will be increased. Between 1946 and 1948 dividends ranged _between 22+ per cent. and 23+ per cent., and the shares were quoted as high as 13s. 3d. in 1949 and up to 18s. in 1948. This year's slight increase in dividend is consis- tent with a sharp increase in the company's carry-fomml, which is up to £165,318, against £122,770 .1,Dpght in. As a Mills of the sale of rediffidant properties, which yielded a profit of £25,787, the liquid posi- tion has been improved, with the cash holding £106,000 higher than on June 23, 1950. The shares look attractive both for their high income yield and their chances-of capital appreciation.
Previous page
