FINANCE AND INVESTMENT
By CUSTOS
WITH the £150,000,000 electricity loan off the stocks the gilt-edged market is now con- solidating its recent advance. That, in my view, is as much as can reasonably be expected for some time ahead. There is plenty of the new electricity scrip to be peddled out by public departments as and when opportunities occur, and there are doubtless other trustee borrowers waiting in the wings. Some new stimulus is now required to set gilt-edged prices on a fresh rise and, as I see things, that could only come from fresh evidence of a substantial improvement in our balance of payments position. The pound, on all the indications, is making good progress but he would be a bold man who would declare that it is over its difficulties.
I.C.I. Dividend Decision Among the recent crop of dividend in- creases which have helped to sustain con- fidence in the industrial equity market has been the decision by Imperial Chemical Industries to raise the Ordinary dividend for 1951 from 12 per cent. to 13 per cent. Although the higher final dividend is not payable on the 10,093,023 new shares which were issued as " rights " in February at 40s. 6d. each, the market assumes that it is the board's intention to establish 13 per Cent. as the rate on the total capital. It is certainly justified in doing so by reference to the latest earnings figures, which show earnings on the increased issued Ordinary capital of over 40 per cent. Following the sharp increase in profits reported for 1950_ the 1951 figures show a further surprisingly sharp advance. Group profit, after depre- ciation but before charging taxation, jumped last year from just over £31 million to over £40 million, and although taxation has called for over £16,550,000, against £12,455,000, the net income of the parent company has risen from £16,844,000 to £20,382,000. As usual, there are large allo- cations to obsolescence and assets replace- ment reserve and to stock replacement reserve, the latter transfer having been increased from £4 million to £7 million, all of which indicates the immense financial strength which the group is building up. What stockholders will be eager to know from the chairman in his annual statement is whether last year's peak earnings can be maintained. I doubt whether they can. At 43s. 6d. I.C.I. £1 Ordinary units are offering the attractive yield of over 6 per cent. on the 13 per cent. dividend. In spite of the prospect of some falling-away in earnings the dividend should remain well covered, and I regard the units as worth inclusion in any portfolio.
Distillers' New Stock The big surprise of the week has been the announcement of ingenious new financing proposals by the Distillers Company. Instead of making a straight" rights "issue of new Ordinary shares the Distillers' directors are issuing £10 million of comparatively short- dated 5 per cent. stock at par with attractive conversion rights. The new stock will be convertible into 4s. Ordinary shares of the company between 1952 and 1957 on terms which vary from year to year, giving an equivalent conversion price of 17s. 3d. for the first conversion option exercisable later this year, with gradually increasing prices ranging from 17s. 104d. in 1953 to 20s. in 1957. With the Ordinaries at present stand- ing in the market around 18s. 3d. the con- version option has an immediate value, and although the plan puts a certain weight on the price of the equity capital it seems to me to be extremely likely that the market quo- tation will be such as to ensure conversion on a large scale within the next two years. Distillers is a progressive and expanding group, and the possibility of an increase in dividend, which will justify a higher price for the shares, cannot be ruled out. It can also be assumed that it is the board's hope that much of the stock will be converted with the minimum of delay. Although not every industrial company is so favourably placed to issue a convertible stock along these lines, I shall be surprised if we do not see other new financing arrangements adopting this tech- nique in the near future. Distillers' £10 million of 5 per cent. loan stock will be offered for public subscription on May 13th, with preferential consideration to the com- pany's 60,000 odd Preference and Ordinary stockholders and to the group's employees. The stock is already assured of an over- whelming success, and I advise anyone who has a pink form to make use of it. The reasons for the stock's popularity are obvious. On the one hand it offers the attractions, from the fixed-interest stand- point, of a 5 per cent, yield on an investment with a twelve-year life with its interest covered thirteen times over. On the other, it offers the right, exercisable over a five-year period, of conversion on attractive terms into one of the soundest of industrial equity shares.
De Havilland Expansion There are all the authentic marks of rapid expansion in the latest accounts of De Havilland Aircraft. In the group balance- sheet stock and work in progress has risen from £9,400,000 to £12,600,000 and cus- tomers' deposits from £3,200,000 to £4,300,000. In his annual statement Mr. F. T. Hearle discloses that the group's order book now amounts to some £85 mil- lion. It is clear that the peak of the group's production programme is still some way off, and the chairman makes it plain that at its height production is bound to involve the company in substantial temporary borrow- ings. Group trading profits for the year to September 30th, 1951, were up from £1,601,612 to £2,297,293, and on an in- creased capital a dividend rate has been established of 74 per cent. At 28s. De Havilland £1 Ordinary units offer a return of only 54 per cent., which is rather less than can now be got on many other leading industrial equities. This return attests the strength of the company's position. from both the technical and financial angles and to the favourable earnings outlook.
Cunard Dividend Surprise Mindful of the cautious attitude towards dividends adopted by the board and also of the increasingly competitive conditions in the North Atlantic trade, few stockholders in the Cunard Steam Ship Company had dared to hope for a further increase in dividend this year. The board's announce- ment of a payment of 15 per cent. for 1951, against the 124 per cent, rate to which it was raised from 10 per cent, a year ago, has, therefore, come as an agreeable surprise. It is especially so, in that the decision to raise the distribution has been taken in face of a falling-off in operating profits. The pre- liminary figures show that the surplus for the group, struck after providing for depre- ciation and taxation, was down last year from £3,477,619 to £3,351,937. Since the United Kingdom tax provision was £3,693,027, against £4,918,238, it appears that operating results were about £1,350,000 less than in 1950. Although we shall have to wait for the full accounts for an explana- tion of this change, stockholders will recall that in his annual statement last year Mr. F. A. Bates forecast that the 1951 results would fall short of the peak figures of the preceding year. Higher costs must have affected net operating results, to say nothing of keener competition of both passenger and cargo on the North Atlantic routes.
In assessing the significance of the dividend increase due weight must be given to the ample cover for the rate now announced. While the net amount absorbed by the Preference and Ordinary dividend payments is only £685,000, another £1 million is trans- ferred to reserves of the parent company and £1,450,413 is being retained by the sub- sidiaries. Earnings on the Ordinary capital, on the basis of the 1951 figures, work out at about 80 per cent., so that only a setback of very substantial proportions could jeopardise the 15 per cent. rate. Following the profit and dividend announcement Cunard £1 Ordinary units have moved up 2s. to 36s. 6d., at which the yield is approximately 8 per cent. Setting the recent fall in freight rates and the uncertainties of the outlook against the strong dividend cover I regard the units as very fairly valued.
Union-Castle Bonus Another dividend decision in the shipping world which, although good in itself, has fallen short of some recent market forecasts is that of the Union-Castle Steamship Com- pany to raise its Ordinary distribution from 10 per cent. to 124 per cent. Flanking the dividend increase is an intimation that Treasury consent has been obtained to the capitalisation of £2,740,000 of the company's general reserve for the purpose of distribut- ing a one-for-one free bonus to the Ordinary stockholders. This will have the effect of doubling the Ordinary capital to £5,480,000, but even at this level it will still be small in relation to the large asset values of the group. Last year's net profit of Union-Castle was down from £1,478,579 to £1,287,926. This somewhat surprising result was wholly due to higher operating costs. An increase in the profits of the group from £1,578,641 to £1,783,039 reflected an appreciable increase in the earnings of King Line, a wholly- owned subsidiary. On the Stock Exchange the dividend and bonus announcement proved the signal for sales by disappointed speculators, the £1 Ordinary units falling sharply from 45s. 3d. to 41s. 3d. Later, however, wiser counsels prevailed and invest- ment est- ment buying brought a rally to 43s. This seems to me a level at which Union-Castle £1 Ordinary units, yielding 6 per cent. on a dividend covered about nine times by last year's earnings, are worth considering as a long-term holding. They represent good value for money as a shipping investment. _
Previous page
