FINANCE AND INVESTMENT
By CUSTOS THIS has been a puzzling week for investors, most of whom, to judge from the falling off
in Stock Exchange turnover, have registered their doubts by doing very little. First came the surprisingly good Exchequer figures showing an overall surplus for the past finan- cial year of £247,000,000. That, instead of the £7,000,000 deficit estimated last April by
Sir Stafford Cripps, naturally induced strong hopes that next Tuesday's Budget might not, after all, be unduly severe. Gilt-edged con- tinued their recovery and industrial equities preserved the rock-like steadiness which has latterly been their outstanding characteristic. Now comes the Economic Survey—a mildly depressing document which, if it tells us little that is new about this year's prospects, cer- tainly does not provide a basis for any care- free buying on the Stock Exchange. It is always anybody's guess, within at least £50,000,000, what inflation gap the Chan- cellor will attempt to bridge in his Budget proposals. Taking the relevant figures in the Survey I would put the gap at something over £150,000,000, to be filled either by cuts in Government spending—which seem un- likely—or by additional taxation. This may seem a small amount, and indeed it is from some points of view, but it needs to be con- sidered in relation to another fact brought out in the Survey—that for £50,000,000 less in real consumption this year we shall be spending £600,000,000 more in money. In other words, a substantial share of what might be described, in this context, as surplus purchasing power is to be drained off in higher prices. What will Mr. Gaitskell do to raise the extra revenue required ? He need do nothing very drastic, but the City will be relieved if next Tuesday evening there is no news of an increase in the tax on distributed profits. Meantime, caution should be the investor's watchword.
Ford Motor Earnings It is now becoming more and more apparent that many of Britain's largest industrial concerns are beginning to reap some of the benefits of ploughing back large sums into the business. Turnover is increas- ing, thanks to plant extensions, and in a period of sellers' markets substantial profits are being earned on the basis of high turn- over and comparatively low production costs. Among the latest examples of record profits which reflect the benefits of plant extension and modernisation are the preliminary figures of the Ford Motor Company. Last year group profit, after deducting all charges, including taxation, rose by £1,326,131 to £3,773,657. The steepness of the rise in gross trading earnings may be judged from the fact that the charge for taxation was £4,729,394, against £2,735,743. On the strength of these figures the Ford directors are obviously justified in raising the Ordinary dividend rate from 10 per cent. to T2f per cent. The higher rate is being paid out of net available earnings of well over 70 per cent. Despite the chairman's
warning that such a high level of profit is unlikely to be repeated this year, share- holders need have little fear about the safety of the dividend rate now in force. At 50s. the £1 Ordinary shares are offering a return of 5 per cent. Even allowing for the risks of the motor manufacturing industry, .I regard these shares as well worth including in any investment portfolio.
British Oxygen Results Another leading industrial enterprise which reports a substantial rise in earnings, again as a result of ploughing-back policy,
is British .Oxygen. Group trading profit, after depreciation, which was charged last year at £1,212,220, against £966,624, rose from £2,297,398 to a new peak of £3,013,364. Although U.K. and overseas taxation has called for £1,712,167, against £1,290,673, net profit of the group was still nearly £300,000 up at £1,301,197. These results amply fulfil the forecast made by the board last autumn that 1950 profits would substantially exceed those of the preceding year. With a final payment of .12 per cent. the total distribution on the Ordinary stock is being maintained at 20 per cent., but the final dividend is payable on an Ordinary capital enlarged by the offer made last year of 693,820 new £1 shares at 70s. each. The 20 per cent, dividend is again consistent with prudent finance, in that £150,000 is put to general reserve and the carry-forward is raised by over £170,000 to £370,793. The £1 Ordinary units are now quoted around 94s. to yield 41 per cent. This yield is in line with the returns obtainable on other first-class industrial equities. Although the scope for early capital appre- ciation is probably limited, the units are a sound holding.
Tobacco Dividend Raised
Hopes recently canvassed in Throgmorton Street that the British-American Tobacco Company would restore its Ordinary divi- dend to the .1946-47 level of 15 per cent., tax free, have been fulfilled. To make this increase from the 14 1/6 per cent., tax free, rate costs only an extra £198,000 net, which looks trifling in relation to the latest profit figures. For the year to September 30th, 1950, group net profit was £15,157,824, or just below the 1948-49 figure of £15,328,761. Like the Imperial Tobacco Company, British-American has struck its net profit figure after deducting the devaluation sur- plus of pre-devaluation stocks of dollar leaf used during the year. In this instance the amount involved is £4,832,775, which has been transferred to a fixed-assets-and-stock replacement reserve. The board's distribu- tion policy remains conservative, the pro- portion of profits now being retained in the business being much larger than that judged necessary by other leading tobacco concerns In the case of B.A.T. funds are not freely transferable among the various subsidiaries through which this vast business is carried on. In consequence, each of them has to rely mainly on its own resources. One promising factor in the current year's outlook is that next May dividends to the parent company (Continued on page 472) FINANCE & INVESTMENT — (Contd. from page 4701
will be permitted on the substantial invest- ment in the prosperous American sub- diary, Brown and Williamson. Hotherto the profits of this undertaking have been frozen as a condition of the dollar loan received from the Reconstruction Finance Corporation. Following the profit and divi- dend statement " BATS " £1 Ordinary units have fallen back slightly to £51. At this level they are yielding just over 5 per cent. on a well-covered dividend. In my view a switch from " BATS " to "IMPS," which are now yielding nearly 6f per cent., is justified at today's prices.
David Whitehead Having called attention in the past to the attractions of the Ordinary shares of David Whitehead and Sons, the Lancashire textile concern, I am well satisfied with this com- pany's latest results. Net profits have jumped from £486,072 to a new record of £651,359, a clear reflection of favourable selling conditions and of the efficiency of this vertically organised textile group. The only disappointment is the board's decision, in the face of such a sharp increase in profits, merely to maintain the Ordinary dividend. The 371 per cent, rate is covered five times over by net earnings. At 4s. 6d. the ls. Ordinary shares are offering a shade over 8 per cent., which seems to me an unduly - high return on such a well-covered dividend in a company which has ploughed back very large sums to reserves in recent years.
Madras Electric Supply For those investors who are not concerned with income yield but only with the chance of capital appreciation the £1 Ordinary shares of the Madras Electric Supply Com- pany look an interesting proposition. This company has sold its main undertaking to the Madras Government for a sum of £1,612,500, of which £1 million has already been received on account. Out of this sum the company has paid off its Preference shares, with the result that the only out- standing capital is £598,200 in Ordinary stock. It is readily calculable that when the balance of the purchase price is received, which I understand is likely in the near future, there should be something close to 38s. 6d. on the LI units. That is without - making any allowance for the com- pany's holdings of the whole of the Ordinary capital of Madras Electric Tramways. If this investment proves to be worth its book value of £143,000 the equiva- lent of another 4s. 9d. on the £1 units of the Supply Company should one day be forth- coming. The Madras authorities have just intimated, however, that they are not interested in the purchase of the Tramways undertaking on any terms at present. Their right to acquire the undertaking in 1955, or subsequently at,21-year intervals, remains. Now quoted in the market around 32s. 3d., the LI units of Madras Electric clearly have interesting possibilities as a liquidation stock. The only uncertainty as regards ulti- mate break-up arises out of the taxation position, which has still to be cleared up with the Inland Revenue authorities. The present price, several shillings below the indicated break-up value, makes ample allowance for tax contingencies.
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