FINANCE AND INVESTMENT
By CUSTOS
THOSE who saw in -the prospect of a Con- servative victory a clear pointer to higher prices in the stock markets have so far been disappointed. Prices have not gone up ; they have fallen more sharply and on a broader front than for a long time past. What has happened to falsify what seemed to be quite reasonable expectations ? First, the Conservative majority has fallen well below City estimates. In consequence, investors have received a sharp reminder of the strength of what is judged to be, in broad terms, anti-capitalist feeling in the country. That seems to imply that, while we are spared, for the time being, from statutory dividend limitation and the other spiteful measures which the Socialists have threatened, oge would be foolish to ignore such measures as long-term possibilities. It may also imply that in the present temper of the country the new Government may hesitate to carry out what the City believes to be sound policies which, superficially, might seem to favour the richer classes. Those are background considerations. More important as factors in this week's setback in markets are the correction of an over- bought speculative position, the fear of a higher Bank Rate and Wall Street weakness.
Investors Hold Off Much of this week's selling, if market reports can be trusted, has come from speculators who had bought liberally in_the few weeks preceding the election in the con- fident expectation of selling at a profit in an enthusiastic post-election market. They have had their fingers burnt and their selling, pressed on an unwilling market, has been mainly responsible .for the weakness of industrial equities. This is a temporary factor which will pass, and I must add that it would not have had any great influence if the investing public had been in a buying mood. More important, especially in assess- ing the outlook, are the implications of the new regime in relation to interest rates and profit-earning. So far as interest rates are concerned, I shall be surprised if we do not see a rise in Bank Rate to at least 3 per Cent. and more probably-4 per cent. in the not distant future. As to profit-earning, that may not be so easy, at least in non- essential trades, as it has recently been. The investment moral ? That this is no time for indiscriminate buying of industrial equity shares. Is it time to sell ? I think not—not at any rate sound shares with well-covered dividends. After the recent fall prices of the strong companies, such as Courtaulds, United Molasses and British Celanese, should now be due for some recovery.
Dividend Raised As expected, the company dividend thaw has set in quickly, now that the statutory dividend limitation threat has been brought to an end. British Celanese have announced a second interim, Golden Hope Rubber and other commodity producers have brought up their payments to the higher levels forecast before the election, and obviously one should be prepared for many good dividend announcementss in the near future from those companies which have an ample margin of- earnings above current dividend rate requirements. Just before the election Electric and Musical Industries forecast a final dividend of 4 per cent. on top of the 8 per cent. interim " if circumstances per- mit." This final payment is now being made, and it brings up the total for the year to June 30th to 12 per cent., against 8 per cent. for the preceding year. Sir Alexander Aikman and his co-directors cannot be accused, in raising the dividend, of any departure from conservative finance. Con- solidated net profit of the group has risen from £342,809 to £663,000, and even those figures do not give a true indication of the improvement in earnings. When taxation is added back and other adjustments are made it is seen that net trading profit was up _from £310,000 to L1,532,000.. The 12 per cent. dividend, which costs £183,000, is covered over three times by the net earnings. Following these results " Emmies " 10s. shares have improved to 22s. 6d. At this level they yield about 5+ per cent. on a well-covered dividend. They still look good value for money.
Debenhams' Decision Not every company With good dividend cover can be expected to increase its dis- tribution, as investors have been reminded this week by Wallpaper Manufacturers and Debenhams. The decision of the Deben- hams board merely to maintain the 31* per cent. dividend—the rate which has effectively been in force for five years—has come as a disappointment to the market optimists. The group's net profit, subject only to tax, has risen from £4,073,000 to £4,100,000 and leaves a handsome margin over the dividend rate. One can only conclude that the decision not to pay more to the shareholders but to increase the group's carry-forward by £459,000 to the formidable figure of £4,543,000 has been prompted by a cautious view of the trading outlook. The interests of the Debenhams group are widely spread and cover not only the luxury trade in the West End of London but a great number of stores in the poorer industrial areas. It is doubtless for this reason that earnings over a long period of years have shown a remarkable stability. Nevertheless, there has been no mistaking in recent months the signs of recession in many branches of the retail trade from recent peak levels, and with a Government in power committed to a dis- inflationary policy the retail outlook cannot be considered especially bright. Following the profit and dividend statement, Deben- hams 4s. Ordinary shares have fallen back from 18s. 6d. to 17s. 6d. At this level they offer what looks to me to be the reasonable yield of 7+ per cent.
White Pass Yukon Plans My recent advice to holders of the Income Debenture stock of the White Pass and Yukon Railway to await developments is now fully justified by the hoped-for repay- ment at par. As I expected, the new plan, under which the railway passes to a Canadian company formed under the auspices of Hambros Bank in London, has made provision for paying off the consoli- .dated Debentures at par, plus arrears of interest, and for repaying the Income stock holders out of the new cash resources being raised. Of special interest from the specula- tive standpoint is the new 5 per cent. Con- vertible Debenture Stock, 1961-76. Under the auspices of Eambros Bank and the Dominiog Securities Corporation $1,700,000 of this stock is being offered at par on the basis of a rate of three Canadian dollars to the pound, so that the price to the public here is £33 6s. 8d. per $100 of stock. The prospectus, which is a formidable document, shows that on the average profits of the last three years the interest and sinking fund requirements on the First Debenture stock, which carries interest at 4+ per cent., is covered four times. Taking the First Debenture and the Convertible stocks together, their requirements are covered twice. This may not seem very strong security on the earnings side, but there are indications' that this railway, which occupies a strategic position, is steadily improving its net takings, and there is also the conversion option to bear in 'mind. Holders of the Convertible stock may, at their own option, convert one-half of their holding for a period of 10 years, ending September 30th, 1961, into 15 Common shares of the new White Pass and Yukon Corporation at a nominal value of $3.33 a share. The point to notice is that anticipated initial earnings of the new company are around 40 cents a Common share, so that the price in the market may soon stand at a level which will make the conversion option valuable.
A Cheap Rubber Plan' Commodity shares have fallen along with industrials in the malaise of the past few days. It seems to me that it is in the com- modity groups that the benefits of the ending of the dividend freeze threat are likely to be most pronounced. Several rubber shares are now beginning to look attractive on their earnings and dividend prospects. Among them I would include the £1 shares of Libis Bahru,' a Malayan pro- ducer, which appears to be out of line with the rest of the market. For 1950 this com- pany paid a 20 per cent. dividend out of earnings of just under 50 per cent. It sold its crop at an average price of just over ls. 6d. a lb. For 1951 the average price realised on sales up to the time of the chair- man's speech in May was over 25d. and for 1952 part of the output has been sold at 3s. 7/d. It seems to me a safe estimate that for the whole of this year the average selling price should be well over 30d. a lb. The special point about this company is that an increase of ld. a lb. in the price realised on its output means a sharp increase in the earnings onits relatively small paid-up capital of £120,000. Allowing for the fact that output this year, like that of most other Malayan companies, has fallen below that of 1950, an extra penny should mean an addition of 5 per cent. in earnings. On this _ basis the company should earn something between 80 per cent. and 100 per- cent. for 1951. It should, therefore, be prepared to step up its dividend from 20 per cent. to at least 30 per cent., and a payment of 40 per cent. would be by no means over-generous. The £1 shares, which earlier this year reached 32s. 6d., are now down to 27s. 3d. They look to me a good speculative purchase in the rubber market.
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