FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT WHEN Canadian banks raise their dividends \ not an eyebrow is raised. But when one of lour " big five " joint stock banks distributes more to its shareholders it is a public and political sensation. Barclays excited extra controversy by proposing to alter its capital structure, merging its 10 per cents maximum A stock and its B " equity " stock into one class of ordinary stock and compensating the B stock by giving shareholders three new £1 shares for every £5 of stock held. I cannot see the point or justification for this change. If you hold a fixed dividend stock it is because you want a fixed dividend and not a variable dividend. Why should the directors force you to change ? And why should they water the old equity stock ? If future earnings justify a higher cash distri- bution than the present it should be paid to ithe old equity shareholders who have 'been waiting for it so long. The Barclays contro- versy has served to call attention to the fact. that an increase in dividends is overdue for , the shareholders of Lloyds, Midland, National Provincial and Westminster. In spite of the fall in the value of money these four banks, having reduced their payments in the slump of the nineteen-thirties are pay- ing out smaller dividends today than they did in 1929. To bring their rates up to the 1929 level Lloyds must distribute an extra 41. per cent., making 161 per cent., and the others an extra 2 per cent., making 18 per cent., 18 per cent., and 20 per cent. respectively. This would sweeten the yields which, ranging from 4 per cent. to 41 per cent. on present dividends, seem to me unattractive. That it should be possible for these four banks to raise their dividends in respect of 1953 is obvious. Not only are their earn- ings higher but they have not had to provide this year for any market depreciation of their gilt-edged portfolios. In fact, the index of gilt-edged prices is about 6 per cent. up on that of December 31st, 1952. For once the " big five " bank directors might forget their political masters and consider their poor proprietors—over 300,000 forgotten, small investors.
Insurance Shares versus Bank Shares
This brings me to insurance shares, which I really prefer to bank shares for the follow- ing reasons. Investment reserves are stronger and portfolios are more widely distributed over real property, mortgages and life policies. As interest earnings normally cover dividend payments, underwriting profits can be put to reserve or go to increase ' dividend payments. Insurance shareholders can therefore look for an automatic, gradual rise in dividend income while bank share- holders may have to wait for a generation, as Barclays proprietors did, before they get a rise in the dividend rate. Several insur- ' ance companies have been increasing their interim dividends this year. For example, London and Lancashire has just paid another 61, which will bring the annual rate up from 6s. to 6s. 6d. At 7* ex dividend the shares will therefore return a yield of about 6s. 6d. per cent. There are higher yields to be obtained in the insurance share Market but special risks must then be taken. Thus, 5 per cent, can be obtained from an industrial life share, such as Pearl or Pru- dential, because of the risk of nationalisa- tion. Or £4 lgs. Od. per cent. from Em- ployers Liability because of the risk of underwriting losses on its vast American business, which may be greater if the reces- sion in the United States develops.
"Selling for Tax" in the U.S.
I had expected Wall Street to fall further as the season of the year approached when selling for tax purposes usually takes place. But it has made a temporary recovery—I repeat temporary because I believe the bear market has not yet received its final testing— and it appears that there are now technical reasons why tax selling can be disregarded. As the Labour Party favours taxation of capital gains it may be of general interest to review American practice. Briefly, the Federal income tax law allows taxpayers to offset short-term gains by short-term' losses and long-term gains by long-term losses. Short-term is defined as applying to securities held less than six months. An excess short- term loss can be applied against a long-term gain and vice versa. Total losses in excess of total gains may be applied against ordinary income up to $1,000 and the balance carried over to the five succeeding years. If the net long-term gain exceeds the net short-term loss half the gain is taxable but the tax is limited to a maximum 26 per cent. Finally, a loss on a security sale may not be claimed for tax purposes if the same, or substantially identical, stocks or bonds are purchased thirty days before or after the transaction on which the tax loss is estab- lished. The result is that taxpayers, when they establish a loss, like to reinvest in a stock which has had an equally steep fall but is not identical in kind. On these tax manoeuvres some stocks will fall and others rise but the general trend of a market will be determined by the dealing of pension funds and other institutional buyers which are not interested in tax selling. Incidentally, the work which this complicated capital gains tax imposes on the revenue offices must be immense. I do not believe that it could be introduced litre without a break-down in our Inland Revenue Department.
Stock Exchange Publicity In proposing the City toast at the recent Lord Mayor's dinner the Chairman of the Stock Exchange pleaded eloquently for more publicity for the City. As far as the Stock Exchange is concerned he could get it very easily—by ppblishing a Stock Exchange quarterly which, in addition to expert articles by worthy financial writers, would contain quarterly figures of the capital raised in the market, of new quota- tions, of the daily turnover of bargains, of the market valuations (in total) of Govern- ment and other securities, in fact, a quarterly statistical record of all Stock Exchange operations.
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