FINANCE AND INVESTMENT
By CUSTOS
IN face of a Budget which, at best, seems likely to be only slightly less disinflationary than its predecessor it was not to be expected that the latest Economic Survey would revitalise the stock markets. There is, in fact, little in the survey to kindle enthusiasm in the hearts of investors. Much space is taken up with hypothetical statistical exercises, much with reviews of the achievements of 1949, and one cannot help noticing that although this year's document is briefer than last year's, it is also even more tentative. Targets, often so widely missed, give place to forecasts, and one gets the impression that the Government's back-room planners are groping for a policy in a set of conditions which they are unable to diagnose as either inflationary or deflationary. For the time being, it seems, deflation is to continue as the official policy, but Whitehall does not seem to be at all happy about it.
The investment implications of the survey ? I doubt whether it really takes anybody very far. Most of the facts about consumer demand and the cut-down in the capital programme were already known and go to explain the existing level of Stock Exchange• prices. It does seem to me, however, that in some of the capital goods industries competition will get keener and profits will have to be earned in the more difficult export markets. It is also apparent that the large demands for capital, at home and overseas, must put considerable pressure on interest rates unless somehow the volume of savings is increased. Meantime, industrial equities and gilt-edged will do well if they hold their ground in the uncertain phase between now and the Budget.
Powell Duffryn Deal In this week's dull markets there has been only a modest rise in the £1 ordinary units of Powell Duffryn following the news of a large-scale commercial deal with the American Socony-Vacuum Oil interests. The joint project for constructing an oil refinery here to process Middle East crude is one of those long-term dollar-saving enterprises whose financial results, in terms of company profits, are hard to assess. It is a reminder, however, that Powell Duffryn, who are already engaged in some promising coal schemes in the Empire, are not allowing the grass to grow under their feet. When, in due course, the compensation money for their nationalised collieries comes in, much of it is going to be needed for capital expenditure in new directions. That means less available for repay- ment to the stockholders, but more invested in what should prove profitable fields. Around 28s. 6d., the £1 ordinary units should not be regarded as a colliery liquidation share, but they look attractive for long-term holding.
British Aluminium Results Once again the British Aluminium Company reports a falling off in trading profits from the peak levels reached in 1947. Consoli- dated trading results were down last year from £1,845,677 to £1,538,359, which suggests that the group was caught between the scissors of higher costs and lower selling prices. From the full figures, however, it is plain enough that stockholders in this well- managed and progressive company have little cause for worry. As a year ago, large sums are being ploughed back into the business by substantial allocations for depreciation and to general reserve, and, thanks to the smaller provision required for taxation, the 10 per cent. Ordinary dividend is comfortably maintained. With its widely-spread interests in bauxite and its far-flung manufacturing facilities, the British Aluminium group is well entrenched in its industry. Even allowing for the vicissitudes of the aluminium industry, I regard the £1 ordinary units around 41s. as very reason- ably priced to yield 5 per cent. The strength of the financial position built up over the years may be gauged from the fact that the general reserve now stands at £2,750,000, or not far short of the issued Ordinary capital of £3,000,000. This is not to imply, however, that large-scale expansion schemes may not involve new financing some time during the next two or three years.
“ BATS " Yield Following quickly on the heels of the good figure& issued by the Imperial Tobacco Company, British American Tobacco, the giant in the export field, has created an equally favourable impression with its results for the year to September 10, 1950. Group profits, achieved in face of the, adverse developments in the Far East, rose from £10,631,000 to £15,329,000, and although the Ordinary divi- dend is merely maintained at 141 per cent., tax free, the outlook for the Ordinary stockholders looks encouraging. If such figures can be achieved with the important markets in the Far East con- tributing little or nothing to distributable profits, need one feel very apprehensive about the future ? There is this other point—that in 1951 the large Brown and Williamson subsidiary in America, pre- cluded from paying dividends until May of next year under a financial agreement with the Reconstruction Finance Company on the other side, will resume payments. " Bats " £1 units have moved up 2s. 6d. following the results, but at 95s. offer the generous yield of nearly 6 per cent. Along with " Imps," they are a good holding.
A High-Yielding Industrial Another company which, like Powell Duffryn, has changed its character, in consequence of nationalisation, is the South-Western Industrial and Water Corporation, formerly the South-Western Gas and Water Corporation. Under the Gas Act, 1948, this company was divested of its interests in the gas industry, and since that time has made substantial new investments in other directions. While it still retains control of several West Country water companies, which have a book value of £249,258, by far the most important invest- ments are now in the Midland Metal Spinning Company, the Keele Street Pottery Company and the Glow-Worm Boiler Com- pany. These are all progressive industrial undertakings and they have been bought at prices on which South-Western Industrial should get a high income return.
On the figures which have been submitted to the Stock Exchange for the purpose of resuming dealings in the company's shares, it appears that earnings on the reorganised Ordinary capital of South- Western Industrial Corporation should be around 40 per cent. An interim dividend of 10 per cent. has already been paid and it is expected that this will be simplemented by a final dividend of 15 per cent., making a total of 25 per cent. for the year ending June 30th. On this assumption the 5s. Ordinary shares, which should be obtainable around 10s. 3d., will be showing a dividend yield of approximately 124- per cent. and an earnings yield of nearly 20 per cent. These returns seem to me to make adequate allowance for the risks involved in an investment of this kind, and there should be some scope for capital appreciation. The Midland Metal Spin- ning Company, which is by far the largest single investment of the Corporation, is a leading producer of domestic aluminium hollow- ware in the United Kingdom. According to Board of Trade figures, its output is roughly 26 per cent. of the total output of the country and in the export market the company's share amounts to 32 per cent.
Cheap Shipping Preference
I have referred, on several occasions, in these notes to the merits of the £1 44- per cent. Cumulative Preference shares of Silver Line when the quotation was around 14s. 9d. The price has now moved up to 17s. 9d. to the accompaniment of reports that dividends, which are in arrears from July, 1948, will shortly be resumed. In my view, the explanation of the improvement in the price should be sought in other directions. I recall the chairman's statement last June that, for the time being, a smaller fleet on a sounder basis would be in the best interests of the company and that the .board must plan ahead on those lines. Surely it is a reasonable inference that the company has now moved still further in the direction of disposing of tonnage judged unsuitable to its needs and, in conse- quence, is approaching the goal of hawing a few vessels remunera- tively employed, plus a substantial cash balance. What would be more probable, in such circumstances, than the repayment, at some later stage, of the preference capital ? The redemption terms are at 21s.,-added to which there are nearly two years' dividend arrears, equivalent to another 9d. net per share. I am not suggesting that repayment will be effected within the next few weeks, but it seems to me that it is such a strong probability that the shares should not be sold. Even at today's level—about 3s., allowing for purchase expenses, below the pay-off price—Silver Line Preferences must be considered cheap
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