FINANCE AND INVESTMENT
By CUSTOS
THE new account opened on the Stock Exchange this Wednesday in an atmosphere of astonishing optimism. Practically every market was higher and some industrial shares scored remarkable rises. The opti- mists who had predicted the development of a great bull market were jubilant. The cynics were forced to reconsider what was making for all this optimism. This week it was perhaps a rare combination of favour- able news. To begin with, a one-for-one and a one-for-two share bonus were announced (Elder Dempster and Babcock and Wilcox) somewhat unexpectedly. Next, industrial reports were good. For example, Monsanto's profits for the six months to June this year showed a full recovery from the set-back of the previous six months. Not only are industrial companies reporting better results but they are increasing their distributions to 'shareholders. There were several more cases this week. Next, the indefatigable Mr. Isaac Wolfson, arriving in New York, made another statement to encourage the bulls of Great Universal Stores. He declared he had come-to buy stores in the United States and Canada (h6 already had 91 in Canada) where he could introduce ' lower-priced quality British goods." Then Mr. Aldrich, the American Ambassador, telling the American Chamber of Commerce here that there would be no deep depression in his country, assured his British friends that America would not become more protectionist. (But would it become less protectionist ?) Finally, the political news was good. At home the proposals for further nationalisation were heavily defeated at the Labour Party confer- ence, which means that the T.U.C. and the constituency parties are still hopelessly split. Abroad, Russia appeared more reasonable, Persia wanted to have back some British oil technicians and Brazil agreed on a settlement of British debts. And behind all this wonderful news is the force of cheaper money which the Government has let loose by reducing Bank rate to 3+ per cent. The gilt-edged market is hourly awaiting the next funding operation and if the terms are promising it will be the signal for the next broad recovery in the irredeemable stocks.
Shipping Shares Come to Life The market in shipping shares . became extremely lively this week when the directors of Elder Dempster announced their one-for- one share bonus. (The shares rose 7s. 6d. to 55s. to yield under 5+ per cent.) A few months ago this market was almost friend- less and the five leading shares were return- ing an average yield on dividends of 7+ per cent. and on earnings of no less than 48+ per cent. What had turned the investor away was a variety of adverse news. First, there had been the slump in tramp shipping freights, which have halved since the height of the Korean war boom. This is not, of course, an index of the earnings of the big shipping groups with their passenger and cargo-liner fleets but it is obvious that the inflated profits of 1952, which reflected the Korean boom, will not be repeated this year. (Tramp shipping freights are down to 75 Per cent. of their 1952 average.) Secondly, there has been a further rise in operating costs, largely on account of the unexpected rise this year in fuel and diesel oil prices. Thirdly, the shipbuilding unions' claim for a 15 per cent. rise in wages moved the ship- owners to call public attention to the " fantastic " (sic) inflation of shipbuilding costs and utter dire warnings that if the wage claim was admitted there would be wide- spread cancellations of new tonnage orders. This was not calculated to attract buyers into the market for shipping shares and it is small wonder that prices fell not so long ago to a level which made the equities of the big shipping groups look very attractive on the basis of dividend and earnings yields. Indeed, if the investor had not been bemused by the pessimism of the ship-owners, who were only "talking their book" in view of the workers' claim, he would have appreciated that the long-established liner groups were not so badly placed as was feared. When tramp steamers are laid up because they cannot be profitably run, the large companies with their cargo-liners are bound to take a bigger share of the available business. When orders for new tonnage are cancelled because of excessive costs, then the old-established shipping groups will be found to have plenty of tonnage, standing in their books at absurdly low prices, which can operate profitably at current freight rates. It is an ill trade wind which blows no ship any good.
Union-Castle Mail It was the mysterious rise in Union-Castle Mail shares over the past few weeks which first made the investor realise that the equities of the big shipping groups were probably undervalued. At the end of August these shares were only 22s. 6d. : as I write they are now standing at 30s. 6d. With every rise there is a rumour and this one brought the rumour of a bid. It was thought that the P. & 0. group intended to buy, but their directors denied they had any such intention. Then the detectives of the financial Press got busy and the City Editor of the Evening Standard discovered that the mystery buyers had accumulated 900,000 Union-Castle shares (worth, say, £1,200,000) hidden in the name of Lloyds Bank (City Office) Nominees and Bishopsgate, Nominees of the National Provincial Bank. He did not name the beneficial owner, but laid suspicion heavily on United Molasses. This made the City Editor of the Daily Mail very angry. He suggested that it was up to the directors of the Union-Castle to find out by taking action under Section 46 of the Companies Act. By virtue of this clause 200 share- holders or shareholders holding 10 per cent. of the issued shares can apply to the Board of Trade for the appointment of an inspector to investigate the beneficial ownership of shares standing in nominees' names. So far the mystery remains unsolved but that should not deprive any genuine holder of any sleep. It is true that at 30s. 6d. the shares now return him under a 5 per cent. dividend yield but for a market valuation of around millions the equity holders of Union Castle possess a fleet whose replace- ment value at present shipbuilding costs is around £80 millions ! Clearly, the shares are worth more to an outside buyer than 30s. 6d. at which the earnings yield on the 1952 results is 27 per cent.
E.M.I. and Pye This calls to mind E.M.T. which was once a popular favourite among the speculators --when the Americans used to come into the market suddenly as buyers—but is now neglected even as an investment. Its 10s. shares at 14s. yield over 8+ per cent. on last year's dividend of 12 per cent. •The Com- pany must be doing well in the expanding television market but the drop in earnings for the year to June, 1952, from 42 percent. to 19 per cent. was due to lower profit margins on records and to bad trading among its overseas subsidiaries. Will the results for the year to June, 1953, which will be announced this month, show any recovery ? The present price, which is around the low levels of a decade, does not suggest much market confidence. Yet Pye increased its dividend from 18 per cent. to 20 per cent. for the year to March, 1953— although its earnings were much the same at 50 per .cent.—and its 5s. shares at 19s. 3d. return a yield of only 5} per cent. And Pye is going into the difficult record manufactur- ing business. Clearly, Pye is the stronger share but competition in the radio and tele- vision trade is keen and profit, margins are cut. For every 20s. received by Pye for the radio and television sets sold only 4d. is left as distributable profit. It looks as if the big companies are killing themselves to get a larger share of the television market.
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