FINANCE AND INVESTMENT
By CUSTOS WITH characteristic stoicism investors have stood up well to the double blow of the breakdown of the peace talks in Korea and of the oil talks in Persia. All that has happened is that such little buying as was previously in evidence has practically ceased and prices have been inclined to drift lower through sheer lack of support. That selling has been as little in evidence as buying is obvious from the idleness of markets and the comparative steadiness of quotations. Where will markets go from here ? As I said last week, I cannot see how industrial ordinary shares can get very far at least until the election date is announced. They may drift slightly lower but probably not to the extent which would justify investors in selling with the idea of re-investing later on. The first effects of the breakdown of the Korean peace talks are already appearing in key commodities, where. the undertone, latterly a littfe shaky, has now become distinctly firm. Gradually the stronger tone of commodities should find reflection in the share markets, in spite of complications due to the dividend freeze.
Grayson, Rollo Problems
On several occasions in recent years I have stressed the merits of the 2s. 6d. ordinary shares of Grayson, Rollo and Clover Docks, the Liverpool ship repairers. When those recommendations were made the shares were standing not much above one-half the current level of 12s. and in the meantime there have been share bonus dis- tributions and the price has been up to 18s. I feel, therefore, that nobody can have much cause for complaint. On the basis of the latest figures, for the year to March 31st, the quotation of 12s. looks to me on the high side. Trading profits, doubtless reflec- ting a falling off in activity and some diffi- culties on the steel and material side, are sharply lower at £313,425 against £445,155. To some extent this setback is cushioned by a fall in the taxation charge at £125,000 against £182,000 but net profit is down from £233,665 to £160,363 and earnings from 160 per cent. to just- over 100 per cent. Even so the 10 per cent. dividend is covered by a handsome margin, but the yield on the shares is only just over 2 per cent. and future dividend possibilities under the freeze are severely circumscribed. What has kept Grayson, Rollo shares at high prices on the Stock Exchange has been the oft-recurring rumour that the company is about to be absorbed by one of the larger shipbuilding concerns. I cannot find any substance in these reports, although some such develop- ment is, of course, always a possibility.
Textile Share Puzzles
–News from textile companies has set investors some puzzling problems. First, Sir Kenneth Lee, chairman of Tootal Broadhurst Lee, discomfited the cotton textile share " bulls " by declaring his view that prospects in the near future are not anything like so good as they appeared a year ago. He warns shareholders not to expect the recent inflated profits to continue. Next came some startling figures from Kelsall and Kemp, the Rochdale wool firm, who announced out of the blue a heavy: loss against a big profit. The cause ? Writing down of wool stocks to accord with: the recent sharp fall in wool prices. The shares were marked down drastically on the Stock Exchange and other wool and worsted shares suffered reverses. Then, as if to warn investors against over-pessimism, Salts (Saltaire), another woollen company, which has achieved a sharp rise in trading profits, announced that the fall in wool which has taken place since March is not. causing the directors anxiety and that they welcome the -
return to a lower price level. All very puzzling, and clear evidence that the various companies are not all placed alike in relation to a sudden fall in stock values. As to the outlook my feeling is that although competition, especially in export markets, is getting keener, demand should be such as to allow the efficient manufacturers to make reasonably good profits. That,, in turn, should mean that current rates of dividends, which are well covered, should be main- tained—and that textile shares, as a group, should not be sold at today's levels.
United Dairies,Outlook
Anybody familiar with the United Dairies organisation knows it to be an efficient and progressive industrial unit. Practical evi- dence of this is regularly forthcoming on the financial side in a growth of turnover flanked by higher profits in spite of unavoid- able increases in costs. For the year to March 31st trading profits of the group rose from £3,633,470 to a new record of £3,882,045. As Mr. Gaitskell claimed £1,883,813 again4 £1,619,513 there was a slight setback in net earnings and the net amount available on the ordinary capital= increased by a 50 per cent. scrip bonus in 1949—works out at approximately 30 per cent. The dividend was varied from 124' per cent. to 15 per cent. just before the Gaitskell deadline date of July 27th, giving a ceiling of 131 per cent. under the limita- tion plan. The £1 units, at 61s., offer 44 per cent. on the freeze rate and 41 per cent, on the current 15 per cent. distribu- tion. Are they cheap or dear ? I think they are good value , for money in spite of the uncertainties in the outlook to which Mr. Leonard Maggs calls stock- holders' attention in a characteristically frank annual statement. The group will clearly have to rely on even greater operating efficiency and a further growth of its ancil-,* lary activities to maintain its profits. Past ' experience suggests that stockholders should not be disappointed by the year's figures.
Pinchin, Johnson Merits Like the motor and cement industries the paint trade now derives a large slice of its profits from export business. Mr. G. R. T. Taylor reminds shareholders of Pinchin, Johnson and Associates this year that the 23. per cent. rise in the group's trading profit has been contributed almost equally by the parent company and the overseas subsidi-: aries. It is a strong feature of the group's- export trade that it has been carefully built up over many years; justifying the claim that "the wide geographical spread of capital investment effectively insulates the company against unsatisfactory local con- ditions and assures a high degree of financial stability." In each of the past five years Pinchin, Johnson's ordinary diVidend has been 25 per cent. and has been comfort- ably covered by net earnings. On the one hand, competition in the paint industry re- mains keen and there are shortages of some raw materials. On the other, this group seems to be able to offset low profit margins by increased sales and is steadily deriving benefits from its programmes of factory modernisation and expansion. Yielding just over 51 per cent. on a dividend unaffected by the freeze the 10s. ordinary shares at 44s. 6d. are a good industrial investment.
Leopoldina Delay The board of the Leopoldina Railway have acted wisely in making a frank statement on the position as they now see it regarding the long-overdue payment for the under- taking from the Brazilian Government. All the legal formalities, it seems, have been completed and all that remains outstanding is the £10,000,000 agreed as the purchase price! Delay in the completion of financial deals is, of course, no. new thing when one party to the bargain is a South American country but this sort of behaviour on the part of Brazil looks foolish as well as dis- creditable. Here is a case in which the purchase money is to come out of Brazil's blocked sterling in London—money which cannot be used by Brazil, except with British Treasury consent, for any other purpose. According to reports from Rio de Janeiro the Brazilian Finance Minister has now de- clared that there are no monetary difficulties —as obviously there are not—and that he expects the whole matter to be settled " in the near future." The City now looks for prompt action in the form of a cheque to the Leopoldina Company for £10,000,000 which will enable the directors to make the promised distributions to its anxious stock- holders.
Good Trust Stock
It is good to see investment trust chairmen exposing the injustice of dividend limita- tion as"applied to their companies. Whether Mr. Gaitskell will recognise the trust claim to special treatment if and when his pro- posals become law remains to be seen, but after their modest setback many trust stocks now look cheap. Among the stocks which I regard as under-valued is the £1 ordinary of Equatorial Trust quoted just under par. This trust has a well-diversified portfolio and at the end of 1950 the asset value of the £1 ordinary units was 28s. 6d. Since that date there has been a substantial rise in the market value of the type of investments— mainly industrial equity shares—which the trust holds. I estimate that today's asset value must be well over 30s., or about 50 per cent, above the quotation for the £1 units. As to dividends, last year's 5 per cent. was paid out of earnings of nearly 8 per cent., so that, had it not been for the freeze, stockholders could have looked for- ward with confidence to a higher payment for 1951. As things are, the units are offering a shade over 5 per cent, on the current rate of distribution.
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