WISE INVESTMENT

IF the Chancellor of the Exchequer really directed his growth of profits tax at "speculation and feverish activity," he has suc- ceeded beyond the wildest hopes. To have wiped out over £300,000,000 of market values in less than a week and thrown all but safety-first investment into the melting-pot is no small achievement. I cannot believe, however, that Mr. Chamberlain intended to disturb investors—or speculators—to the extent that he has, and it is doubtless true that the shock of the new tax has been considerably magnified in the actual slump in market values. As so often happens when quotations fall sharply, a widespread lightening of commitments becomes either desirable or necessary and a market bare of buyers is oppressed by a rising volume of sales.

Until we know how far the Chancellor is prepared to move in meeting the obvious objections to the tax in its present crude form, it is difficult to assess the merits of Ordinary shares. As a broad generalisation, however, it appears true that industries whose profits in recent years have been relatively stable, such as retail stores, insurance, banking, tobacco, would fare well under the tax, while those which have been recovering from depression, such as iron and steel, engineering, base metal production, rubber and oil, would be hit. Having made this broad classification, I must add that at current market prices I regard most equity shares as attractive for those who can afford to take the risk of further sharp fluctuations before markets recover their poise. The investor and speculator have both received a nasty shock, and there may be more dark days ahead before it is glad confident morning again in Throgmorton Street.

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RAILWAY PREFERENCE STOCKS

One effect of the Budget proposals will obviously be to tempt more money into fixed-interest stocks, at least until the prospects of equity shares can be more accurately gauged. The home railway preference group is offering attractive yields for investors in search of relatively high income and moderate cover, of which the following provide a representative selection : Current Yield %

Price. £ s. d.

L.M.S. 4% First Preference 821 4 18 0 L.M.S. 4% 1923 Preference 75 5 7 0 L.N.E.R. 4% First Preference 67l 5 19 o Southern 5% Preference .. 16 4 7 0

The Southern issue, as the lower yield implies, has the most ample cover and enjoys trustee status. The L.M.S. 4 per cent. First Preference is also acquiring definite investment merit as the company's revenues improve. On the basis of last year's figures the dividend was covered with a margin of earnings of L2,795,00o, and I shall be surprised if, in spite of rising costs, the position is not strengthened in 1937. Both the L.M.S. 1923 Preference and the L.N.E.R. First Preference are in a more speculative category, but may be regarded as good value for money in relation to the high yields. I antici- pate that the L.N.E.R., as well as the L.M.S., will achieve a modest rise in its net revenues this year, especially if, as now seerns likely, it is found practicable to introduce a rather higher level of fares and freights. From the taxation angle, the railways are still earning so much less than the exemption limit of 6 per cent. on the cost of their assets that they may safely be regarded as immune from the N.D.C.

MORRIS MOTORS' POSITION

I 'must confess to disappointment at the market's reaction to the Morris Motors dividend, understandable as it is in the new conditions. Even at 42s. 3d., including the 2s. 3d. net of dividend now declared, the 5s. shares would be yielding over 51 per cent. on the 45 per cent. rate, surely a reasonable basis of valuation for an equity of a progressive concern with immense reserves and distinctly promising earnings prospects. But conditions have won and instead of improving, the price has slithered down to 38s. 6d. under the pressure of very few sales. I do not advise holders to sell now, as the shares would be among the first to recover with any improvement in market psychology. The full earnings story of 1936 has not yet been told but it may be assumed from the company's past conservatism, through which the present financial position has been built up, that the 45 per cent. distribution has been covered by a large margin. Profits from the subsidiaries brought into the group last year will have contributed to total earnings and the consolidated balance-sheet will indicate the huge internal strength of the group. Meantime, the company's trading is progressing favourably, especially in the Commercial and the Wolseley sections. The new tax ? Well, profits have risen since the basic 1933-34-35 period, but not so spectacularly as those of many other motor manufacturers. Although it looks as if some N.D.C. will be payable, I should say that Morris Motors shares are' likely to prove quite a satisfactory industrial holding.

* * * * RUBBER SHARE SETBACK

Having been at some pains to explain the merits of rubber shares in recent notes, I feel obliged to say something of their prospects in the light of the growth of profits tax. As one of the industries whose profits have risen steeply during the past two years rubber stands to contribute substantially under the proposed plan. Most companies earned profits last year considerably larger than the average for 1933-34-35, and, as I have previously shown, should succeed this year in doubling the 1936 figures. Hence the expectation that there will be a large reservoir of taxable profit and hence, again, the sharp fall in rubber share quotations on the Stock Exchange.

Admittedly, the commodity itself, along with most other basic raw materials, has not escaped the speculative debacle, but even at told. per lb. it gives the vast majority of companies a good margin on which they can show substantial profits. Even allowing for the full incidence of the new tax, I should say that net available earnings are likely to be sufficient to justify a higher level of rubber share quotations. Shares I have previously recommended such as Java Amalgamated, now 25s., Anglo-Java, quoted at Is. 6d., and North Malay, now 3s. 3d., are worth picking up as lock-up speculations.

* * * * Venturers' Corner Imagination as well as courage is required to give Cunard stocks any semblance of being attractive in the light of the company's latest report. Gross revenue was actually Li6,000 lower last year than in 1935 and the net profit was only £23,000, a pathetically small sum in relation to an issued capital of over £8,000,000. Fortunately, however, the Cunard Steam Ship accounts do not tell the whole story. The real key to the position is now provided by the report of the Cunard White Star, the subsidiary formed in 1934 to operate the North Atlantic fleet and owned as to 62 per tent. by Cunard and 38 per cent. by the Oceanic Steam Navigation. Thanks to the ' Queen Mary,' which fulfilled all expectations, Cunard White Star turned a loss of L62,000 in 1935 into a " profit " of £470,000, although in both cases the balance was struck before providing for depreciation.

This year there is sure to be another big improvement and I shall be surprised if the profit is not nearer a million than half a million. In that event, I should expect the Cunard White Star to adjust its balance-sheet to a more reasonable valuation of its assets, make a beginning with depreciation allowances, and put itself in a position to pay a small dividend to the controlling companies. At this stage I do not recommend Cunard Li ordinaries, even at 7s., but would not dissuade a speculator willing to take a chance on international trade recovery from buying the 5 per cent. First Preference stock at 72. Included in the price are nearly six years' arrears of dividend, equivalent to £24 net, and, after debenture interest, this stock has the first call on any available earnings

Cusros.

[Readers' enquiries, or requests for advice, regarding particular shares will be answered periodically as space permits. Corre- spondents who do not desire their names to appear should append initials or a pseudonym to their questions.