FINANCE AND INVESTMENT
By CUSTOS
WITH the Budget looming close ahead stock markets are behaving in the way one would naturally expect. Whatever benefit has been derived from the temporary relaxation of international political tension has gone to the gilt-edged market, where buying has been resumed on a substantial scale and prices have attained new peaks. Although the response to the Brighton conversion operation, which may be regarded as one of the laboratory tests for 24 per cent. long-term borrowing, has not been particularly promising from the Treasury point of view, there is a strong and obviously well-founded feeling that whatever next week's Budget may bring it will contain nothing likely to affect gilt-edged stocks adversely. It seems a safe assumption, indeed, that Mr. Dalton will take the opportunity next Tuesday to beat the cheap money drum, and it will not be surprising to see gilt-edged carrying on their upward movement.
Whether fixed interest securities will be given some special fillip through the medium of a back-hander at the equity shareholders is anybody's guess. To judge from the recent behaviour of markets, there is a fairly widespread feeling that Mr. Dalton may aim a blow at equity investment as such. It is argued that only in this way can he combat the inflationary tendency of rising dividends, and that a subdued equity share market would prove advantageous to the cheaper money campaign. 1 hesitate to take the opposite view, since there is no telling what a Socialist Chancellor of the Exchequer may feel justified in doing to Ordinary shareholders, but I shall be surprised if next week's Budget aims any really serious blow at Ordinary share investment. If the future of gilt- edged depends on depressing the equity market, then the outlook must be judged decidedly unpromising.
RUBBER PRICE PROBLEM
Rubber-producing companies and their shareholders have every reason for dissatisfaction with the Government's policy in the matter of price control. It is now learned, although there was no official announcement, that the agreement under which the United States buys rubber from the British controlled estates in the Far East at 201 cents a lb. has been extended until June 30th. This seems to carry with it the corollary that the producers will continue to be paid only rod. a lb. for their output, a price which, so far as can be judged, leaves a quite inadequate margin of profit. Until the report of the Government's economic adviser in Malaya has been received it is impossible to tell what production costs amount to in present conditions, but allowing for the heavy expenditure on rehabilitation, it is doubtful whether many estates will be able to earn a fair return on capital with rubber at rod. a lb. The sooner this price is adjusted to realities, the better for all concerned.
A PROMISING EQUITY
In the dull market conditions of the past fortnight insufficient attention has been given to the implications of the refinancing plans announced by Dolphin Square. This company, which is con- trolled by Richard Costain, the public works contractors, is repay- ing £483,404 of loans due to the parent company and replacing its mortgages by an issue of Li,469,000 3* per cent. debenture stock. In this way Dolphin Square is doing some cheap refinancing, and from the published figures of earnings it appears that after covering debenture service, taxation, etc., there should be something like f4o,00o available for dividends. The Dolphin Square equity con- sists of a purely nominal sum of £2,000, all of which is held by Richard Costain, and which, moreover, is carried in Costain's balance-sheet at a mere £2,000. It is clear, however, that this equity is in fact very valuable, and whereas in the past Richard Costain has drawn no revenue from its Dolphin Square investment, it now seems a pretty safe assumption that a dividend will be drawn from this source in future years. On the £507,985 of Costain's ordinary capital an extra k30,000 or £40,000 a year would be a very useful addition. For 1944 Richard Costain paid an 8 per cent. dividend out of earnings of nearly 16 per cent., and I shall be surprised if the 1945 results are not distinctly satisfactory. Quoted around 46s. 6d., Richard Costain Li ordinaries are yielding about 31 per cent, on the 8 per cent. dividend and about 7 per cent. earnings. With the prospect of a heavy volume of work to be handled in the next few years, and an extra contribution to revenue from the Dolphin Square investment, these shares look to me a good lock-up for capital appreciation.
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