FINANCE AND INVESTMENT
By CUSTOS
MARKETS are still staggering under Mr. Gaitskell's hammer blow of dividend control. This is at once the most unjust and the most irresponsible attack yet made on the ordinary share investor. Mr. Gaitskell must now take his place with Mr. Dalton and Sir Stafford Cripps as a Chancellor of the Exchequer who, under pressure, has allowed party politics to come first and leave sound economics a very bad second. Only a cursory examination of the course of wages and ordinary share dividends in recent years is needed to show that wages payments were well in the lead. If dividends were begin- ning to make up some small part of the leeway there was surely no ground for criticism. The supply of risk capital for industry, so badly needed to finance expand- ing production, was, beginning to flow smoothly and if there was a rise in ordinary share values on the Stock Exchange, that was no bad thing. In any event, there was ample evidence, before the dividend control bombshell, that the rise had slowed down and had become a highly selective move- ment.
First Reactions Inevitably the first -reaction on the Stock Exchange has been a severe downward adjustment of quotations of the great majority of equity shares. For most com- panies the relevant provision in the Control of Dividends White Paper is that which proposes to restrict future dividends—for a three-year period—to the average of the actual payments for the last two years. Corn- . panies which have not recently raised their dividends, such as J. & P. Coats, or which have reduced their payments, such as Griffiths Hughes and Spurling Motor Bodies, are not hit. The first group can go on paying the same rate—although they are left with a relatively low ceiling—and the second group can make increases to rates half-way between the two dividends paid. But many com- panies, with Mr. Gaitskell's implied blessing, have recently stepped up their dividends. These concerns, which include Courtaulds, Imperial Chemical Industries, United Molasses and a whole host of other well-run undertakings, will be compelled, under the freeze, to reduce their distributions.
Mass of Anomalies
Nor is this all. For new companies the plan proposes a 7 per cent. dividend calcu- lated on capital. This might be reasonable if capital were properly defined to include reserves and thus bear some relationship to the real resources employed. There is no such definition in the White Paper which uses the words paid-up capital. How, in rela- tion to this proposal, can dividend forecasts which formed the basis of recent new issues of capital be fulfilled ? Nobody in the City knows the answers and apparently the back- room boys at the Treasury don't know them either. In any event, they are not talking and it is hard to see why they should until they have something firmer to go on than the vague outline in the White Paper. Mean- while, investors in these recent new issues simply cannot know where- they are. My own feeling is that even Mr. Gaitskell and
his advisers will be forced to see the reason- ableness of allowing prospectus promises to be carried out. Shareholders in these com- panies should not be frightened into hasty selling. The anomalies as regards future dividend possibilities are almost too numerous to discuss. There are the cases of companies which, after several lean years, have now struggled back to prosperity. A good instance is the Silver Line, now making good profits but which has paid no dividend on the Ordinary capital for four years. Under the proposed control scheme the Ordinary ' dividend will apparently be restricted to 5 per cent.—a paltry reward for the suppliers of risk capital in the sharply fluctuating business of transhipping. Then there are the rubber companies and tin mining concerns just on the point of paying high dividends after many lean years but now precluded simply because dividends were not declared before July 27th, the vital date. The scheme, in short, seethes with anomalies and it seems certain that, whenever the proper machinery is set up at the Treasury, there will be long queues of applicants for special treatment.
Policy for Investors Meanwhile, what are investors to do ? It seems to me that now that the first and, in many instances, - drastic price adjustments have been made on the Stock Exchange there is a good case for holding on. Courtaulds' Ordinary shares, for example, have come back from 53s. 9d. to 45s. 3d. At the lower level they are offering a yield of roughly 44 per cent. on the- new ceiling rate 9i per cent. This provides a reasonable basis for holding Courtaulds' equity, even though under the proposed freeze it will be relegated to the status of an Ordinary share with a dividend ceiling and no floor. By and large, sound industrial equities, after their fall, are now standing at levels which should justify the long-term investor in refusing to sell. The individual investor's decision will obviously be influenced by his view of the political out- look. Anyone pessimistic enough to think that when the political show-down comes the Socialists will remain in power cannot possibly feel optimistic about equity shares. On the other hand, those who feel that an early election is in prospect, at which the Socialists will be defeated, will certainly feel reluctant to sell and may even find in the next few weeks some opportunities for taking up some of their favourite stocks at attractive prices. Even if there should be no early election I think it fairly safe to assume that the dividend freeze plan in its final legal form will be much less severe and arbitrary than the scheme outlined, obviously after too little thought, in the White Paper.
A.E.I.—Siemens Deal Considerable interest has been aroused in the City in the acquisition by Associated Electrical Industries of a substantial interest in Siemens Bros., the submarine and tele- phone cable makers. Although it is not known at what price the A.E.I. group succeeded in buying the block of 450,000 Siemens £1 Ordinary shares from the Board of Trade, the City believes that the successful bid was in the neighbourhood of 55s. That is 14s. above the current market quotation of 41s. and is a striking indication of the value which the A.E.I. put on this new trade investment. The purchase seems to fit in well with the A.E.I. group's manufacturing interests. It gives this powerful combine a larger stake in the marine cable field and, even more important, it provides them with a footing in telephone cable manufacture. From the Siemens standpoint the liaison with the A.E.I. should obviously be bene- ficial, through the access it gives to the A.E.I. group's extensive research facilities. I can sympathise with the acute disappoint- ment and chagrin felt by General Sir Hubert Gough, the Siemens chairman, that the Board of Trade has not seen fit to accept Siemens' own bid for the shares, which would have been passed on to Siemens' present shareholders. The company had strong moral claim to prior consideration. It now finds itself in the position of seeing a 15 per cent. interest in its Ordinary stock pass into the hands of a much larger elec- trical manufacturing undertaking. Siemens' directors must, therefore, expect that at some later stage A.E.I. will seek to have some voice in Siemens' trading policy. Meantime, Siemens £1 Ordinaries at 41s., yielding about 44 per cent. on the indicated ceiling rate under dividend control, look well worth holding Two Rubber Shares
No section of the Stock Exchange was thrown into greater confusion by the threat of dividend control than the rubber share market. As I have explained, this market is full of anomalies, in that the proposed freeze-must in many cases result in dividends being paid far below the rates justified by earnings and which the directors had it in mind to pay. Through a special sub-com- mittee the Rubber Growers' Association is preparing a strong case for special treatment for the industry, which will be forwarded to the Treasury, and it seems a reasonable assumption that some concessions will in due course be forthcoming. There are some com- panies' shares, however, which, in relation to current market prices, already look attrac- tive, even if there is no modification of the freeze plan. Two shares, whose merits I have outlined in these notes in recent weeks, come into this category. London Asiatic 2s. shares, which have been up to 4s. 3d., are now back to 3s. 104d. In this case the indicated ceiling rate, assuming that there are no concessions from the Treasury, is 274 per cent. At the present price, therefore, these shares are offering a yield of about 15 per cent. This does not seem at all ungenerous for the shares of -a company with a magnificent balance-sheet and which should be able to pay 274 per cent. comfortably, even with rubber standing far below its present level.
The other share mentioned here a week ago is Harpenden (Selangor) £1 Ordinary, which having been up to 21s. is now standing at t8s. 9d. In this instance the ceiling rate under the freeze is 15 per cent., so that the shares are now priced to give a return of over 16 per cent. Included in the present quota- tion of 18s. 9d. is just over Is. 6d. net of dividend, announced by the company a month ago. Both these companies enjoy first-class management and are efficient producers.
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