FINANCE AND INVESTMENT
By CUSTOS
IN face of the disappointing war news from Korea and the growing seriousness of the fuel position at home the New Year has opened in the stock markets on a surprisingly cheerful note. Admittedly, London has had an encouraging lead from Wall Street, where inflationary forces have found expression in a broad advance in equity shares, and there have also been the good interim dividend announcements from the Royal Dutch-Shell group and Associated Portland Cement. Nothing helps investment and speculative senti- ment more than increased dividends from large industrial companies, and it is now becoming abundantly clear that—on sober lines— equity dividends are being raised. When one looks at what is involved in these increases in relation to available net earnings and to the wider inflation problem it is difficult to quarrel with the boards' decisions. The effect is to restore some of the dynamic qualities to ordinary share investment, as is altogether appropriate to shares which carry the risks of the business.
Standing out in sharp contrast with the general firmness of markets are gold shares and, oddly enough, certain groups of com- modity shares, especially tin and rubber. As a whole the December dividends announced by the South African producing mines were satisfactory enough. They provide a basis on which most of the shares offer reasonably good yields. But costs are going up and, so far as we can judge, there is no early likelihood of any fresh increase in the selling price of gold. Until that prospect is improved —and this, in present conditions, could come about only through America raising the dollar price of the metal—gold shares will remain out of favour. Taking the long view, I regard the recent fall as having been over-done, especially in some of the promising developing propositions, such as Stilfontein.
Rubber and Tin Shares What of tin and rubber shares ? Here the trouble is not financial but political. With the commodities selling at anything like present prices the companies are bound to make high profits even allowing for increasing costs. I estimate that the prospective earnings yields on many first-class rubber shares at to-day's quotations range between 50 and 100 per cent. The trouble in the market is the sudden drying-up of buying through increasing uneasiness about the safety of the companies' undertakings and a stepping up of banditry. Again, I think the pendulum has swung too far and that rubber and tin shares are now too cheap. But already there are speculations on the course of events in the Far East and as such these shares are unsuitable for cautious buyers who are unprepared to accept risks.
Gilt-Edged Outlook The outlook for gilt-edged ? Not so bright, in my mind, nor altogether depressing. In the short run gilt-edged should derive some help from the publication of Britain's gold reserve figures for the fourth quarter of 1950. Bearing in mind the maintenance of commodity prices at high levels I shall be surprised if the sterling area's surplus is any less than the 187 million dollars achieved in the third quarter ; it might turn out to be more. On a larger view it is difficult to link any fresh easing of interest rates, leading to higher gilt-edged prices, with the growing pressure of rearmament demands on capital resources and the obvious need to put some curb on unessential copied outlays. Gilt-edged will do well if they hold their ground.
First Banking Results
To judge from the preliminary figures for 1950 announced by Martins Bank no great change in the general level of banking profits is likely to be disclosed. Martins' profit figure, struck, as usual, after charging all expenses, providing for taxation and making transfers to inner reserves, out of which provisions have been made for bad and doubtful debts and other contingencies, amounted to £73895 last year, against £725,170 for 1949. For the twelfth successive year the dividend is being brought up to 15 per cent. by payment of a final of 7} per cent. Once again the bank makes substantial allocations to published reserves by transferring £250,000, against £275,000, to reserve for contingencies and setting aside £125,000, against £100,000, to premises redemption. With its impor- tant connections in the industrial north Martins may have fared
relatively rather better than some of the " Big Five," but setting one factor against another I think it is safe to assume that banking profits, as a whole, have been well maintained. On the one hand, the banks increased their advances last year, on an average by about 11 per cent. Advances are the most remunerative outlet for banking funds, although it is necessary to keep in mind the fact that loans to State-owned Boards, which carry lower rates of interest than loans to private industrial concerns, accounted for a substantial part of last year's rise in advances. From the general increase in banking turnover the banks must have reaped some benefit in the shape of larger commissions, and as investments showed little change total gross earnings were probably higher than in 1949. Unfortunately, there was no halt last year in rising expenses. In consequence, the net profits accruing to the banks, as reflected in the published profit figures, are unlikely to show any substantial change. Nor does it seem at all likely that there will be any alteration in dividend rates. On current rates of dividend most fully-paid bank shares are offering yields of rather less than 4 per cent. I see no reason to change my view that bank shares are solid investments.
Shell Dividend Surprise
The interim dividend announcement of the Shell Transport and Trading Company has provided the best tonic for the oil share market for a long time past. In doubling the interim for 1950 from 23 per cent., tax free, to 5 per cent., tax free, the Shell directors have exceeded the market's most optimistic expectations. In fact, the view most widely held in the City has been that the company would continue to adhere to its ultra-cautious distribution policy. With its extensive interests in practically every section of the oil business, the Shell group must have benefited from last year's record oil output, flanked by a satisfactory level of selling prices. The group must also have begun to reap some of the first fruits of its large-scale capital development programme. The inference must be that the 1950 earnings of the group will not merely cover a substantially higher Ordinary dividend but will, as usual, enable provision to be made on a generous scale for reserves. What the final dividend will be is anybody's guess, although one is surely justified in assuming that the doubling of the interim indicates the board's intention to pay an increased final next May. For 1949 the 21 per cent. interim was followed by a 5 per cent. final, making a total of 73 per cent., tax free. It seems to me that the minimum total likely for 1950 is 123 per cent., tax free, and that there is a possibility that the final dividend will be doubled, which would mean a total of IS per cent., tax free. Since the announcement of the interim Shell £1 Ordinary units, which have always been a favourite of these notes, have jumped 10s. to 78s. 9d. They still appear to me to be under-valued. In the wake of Shell the I units of the Burmah Oil Company, which has a substantial investment in Shell Ordinary stock, have also improved and are now quoted at 55s. 9d. On the 15 per cent. dividend Burmah Oil are still yielding over 53 per cent., with the dividend payment covered by the income from investments in Anglo-Iranian an.1 Shell Transport alone.
A Ship Repairers' Share In view of the recent improvement in freight rates and the increased activity in the shipping industry, a good case can now be made out for the shares of ship-building and ship-repairing companies. Among the dry-dock owners and ship-repairers is C. H. Bailey, Limited, whose business is carried on at Newport, Cardiff and Barry. This company has a good trading record and has recently leased from the British Transport Commission a com- mercial dry dock at Barry for 99 years from July 31st, 1950. The dock is to be widened, and when completed will be capable of accom- modating most types of modern tonnage. A £200,000 issue of 41 per cent. Debenture Stock is being made to finance this project. Mean- time, the company is paying a 20 per cent. dividend, which for 1949 was covered by earnings of nearly 130 per cent. The assets position is also strong, net liquid assets at the end of 1949 being equivalent to over £1 a share on the 5s. Ordinary shares. At present these 5s. shares are quoted in the market around 13s. 3d., offering the generous return of 73 per cent. on a well-covered dividend. At one time in 1949 the shares were up to 18s. 6d. and in 1948 reached 19s. 6d. In present conditions there should be scope for recovery from to-day's level
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