FINANCE AND INVESTMENT
By CUSTOS As I expected, industrial equities have advanced steadily, if unspectacularly, during the past week. Gilt-edged came to life again with the end of the half-year, and sub- stantial institutional buying was reported. It is now assumed that no issue of the denationalised steel stocks will appear before the autumn, and this assumption has appa- rently attracted some idle funds back to the market. While the number of recorded dealings is still below normal, the undertone remains firm, and the new account opened cheerfully on Wednesday. Sentiment has been helped by a belief that the next figures of the gold and dollar reserves will show a further moderate improvement, but some uncertainty is felt about the trend of the reserves later this year. While, therefore, the immediate prospects for the stock markets seem reasonably hopeful, the further outlook is obscure. There are still too many imponderables in the stock market equation to warrant any reliable forecast.
War and Peace
Why did share prices fall when Russian policy changed, and hopes of peace came to the world? Was it because Wall Street and Throgmorton Street fear peace and batten on wars, hot and cold? The idea is absurd, but some people accept it; and of those who do not many think it odd—and vaguely indecent—that share values should fall on hopes of peace. Why prices fell is explained by Mr. G. Keith Funston, President of New York Stock Exchange, in The Exchange Magazine of New York. He points out that the stock market reflects the composite opinion of millions of investors, who, like other people, are swayed by hope and fear. The market always responds to sudden important developments such as a danger of war, hopes of peace, a political upheaval or a labour crisis. When the Korean war broke out in mid-1950, for example, Wall Street prices slumped more severely than they did in March-April of this year. The peace offensive following Stalin's death, introduced new factors defying immediate measurement; and the hope of peace suggested the possibility of far-reaching changes in an economy geared to an enor- mous defence programme. In the short run, therefore, a state of peace might involve unemployment of much capital and labour until factories and plant could be adapted to produce more "useful" goods than guns, tanks, warships, bombers and rockets. But in the long run peace would bring a higher standard of living, a bigger output of things people want and, by way of reduced taxes, more money to buy them. It was not the fear of peace which depressed the markets; it was simply the fear of transi- tional difficulties and delays.
Knitting Wool Revival A remarkable transformation is revealed in the preliminary figures for the year to May 2nd of Patons & Baldwins, the famous manufacturers of wool and hosiery yarns and knitting wool. After charging £141,000 more for depreciation and setting aside £1,209,956 for tax, against net tax refunds of £154,799 in the previous year, the net group surplus attributable to the holding company is £1,628,616, compared with a deficit of £482,660 for the previous year, after writing down stock. The surplus includes £609,879 of non-recurring credits, but £606,434 of this, together with £393,566 from the net trading surplus, making £1,000,000 in all, is placed to contingencies reserve, in contrast with a transfer of £700,000 from that reserve a year ago. The most welcome feature of the results from the shareholders' viewpoint lies in the final dividend of 11 per cent., plus a bonus of 5 per cent., making 20 per cent. in all for the year, compared with 10 per cent. for the previous year. The distribution is thus restored to the 20 per cent. paid for the six years from 1945-6 to 1950-51 inclusive. This distribution is apparently covered over two-and-a-half times by the latest earnings after deducting the non-recurring credits Following the news the £1 Ordinary units rose to 60s. 6d. If the net dividend of about ls. 9d. is deducted from the price, the yield is about 6i per cent. In spite of the 1951-52 setback, I regard the units as an attractive investment.
Ward and Goldstone In common with most manufacturers of cables, wiring and other accessories for the electrical, radio and motor industries, Ward and Goldstone have had another good year. Profits for the year to March 31st are £85,731 higher at £506,427, but tax takes £73,289 more at £308,870, so that the net profit is only £12,442 better at £197,557. A final dividend of 30 per cent. brings the total payment up to 45 per cent, for the year, as for the previous period; but since a one- for-three share bonus was distributed in July last year, the latest payment is equivalent to 60 per cent. on the old capital. The distribution is covered about 41 times by earnings, and the 5s. Ordinary units appear to be conservatively valued around 34s. 9d to yield 61 per cent.
A WA-covered 81 per cent. Yield What is the value of a £1 Ordinary share in a well-established oil company with an excellent record and paying a dividend (including bonus) of 11 i per cent. which is covered six times by earnings? The market answer is 27s., which is the current price of Lobitos Oilfields. This price seems to me to be on the low side. The company has a refinery in England, a tanker fleet, an interest in Anglo-Ecuadorian Oil and, through a subsidiary, oil properties in Peru. Net profit for 1952, announced recently, was £363,530 higher at £833,555, but the improvement was largely due to a reduction in Peruvian tax and the absence of any charge for tanker survey repairs, which cost £150,000 in 1951. There are no Debentures or Preference shares, and last year's earnings on the Ordinary capital were about 70 per cent., or six times the 111 per cent. distri- bution. Oil production was slightly higher in 1952, and the output for the first quarter of this year showed a rise of 81 per cent. on the corresponding figure in 1952. Higher prices for refined oil products sold in Peru were authorised last February; and while the new prices will not cover the total cost of the products, they will reduce the heavy loss previously borne on Peruvian sales. When the full accounts for 1952 are issued, I expect them to reveal a net asset value of 43s. per £1 Ordinary, that is 16s. more than the current price of 27s. At this price the Ordinary show a yield of 81 per cent., and in view of the six-fold dividend cover this seems generous, notwithstanding the risks of oil production in Peru.
Dalgety New Shares Several important companies are raising new money just now by means of "rights" issues to their own shareholders. Among them is Dalgety and Company, the largest wool merchanting house in Australia, which has expanding branches in New Zealand and East Africa. This company, which has never failed to pay a dividend since it started business in 1884, is issuing new 8s. "B" Ordinary shares at par, and these can now be bought around 31d. premium. At this level the shares look to me an attractive investment, since on the indicated dividend of 81 per cent. they will be yielding nearly 81 per cent. During the wool boom the company's profits naturally rose quite sharply, but the quality of the management has been demonstrated during the fall in wool prices. For 1951-52 earnings were 42.6 per cent. on the capital then ranking or 19 per cent. on the present capital without allowing for any earnings on £960,000 of new money. The new shares at the moment are nil paid, and buyers should note that in the near future they will be called upon to put up the 8s. a share. In other words they should regard the price of the shares as around 8s. 31d. While the new shares will not rank for the final payment of about 3d. net per share for the year just ended, they have the advantage over the old, that a buyer escapes the 2 per cent. transfer stamp.
Good Banking Share
It is rare for a bank to increase its issued share capital, but the Standard Bank of South Africa is now doing so by issuing two million new £1 shares (fully paid) at 30s. each. This step is being taken to bring in additional resources and also to keep the issued share capital more closely in line with the steady growth of the bank's activities. The Standard Bank's business ranges over a wide area on the African Continent, and the profit and dividend record is a fine tribute to the skill with which the bank's affairs have been conducted. For the year to March 31st, 1953, the distri- bution was raised from 10 per cent. to 111 per cent. on the strength of a further increase in profits from £511,999 to £594,762. These figures show a good cover for the higher distribution, and it is not surprising that the directors state that, provided there is no important change for the worse in operating conditions, it should be possible to maintain the 111 per cent. rate on the increased capital. The new shares, on which the 30s. has still to be paid, are at present available in the market around 2s. I id. premium, which means that, in effect, a buyer pays 32s. 11d. free of stamp. At this level the shares give the attractive yield of 7 per cent., or about 21 per cent. more than can be got on home bank shares. 1 think a price of 37s. 6d, to yield 6 per cent. would be more appropriate. Standard Bank shares have proved a good investment in the past, and I regard this as a good oppor- tunity to put them away for the future.
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