FINANCE AND INVESTMENT
By CUSTOS As the Budget approaches markets are put- ting up a brave show. As everybody is now well aware, Mr. Butler has nailed his colours to the mast of disinflation and next Tuesday's blows cannot be other than severe. The City hopes that they will be aimed shrewdly and will be severe enough for the job. Only an adequate Budget in this sense can give the pound a reasonable chance in its fight against a fresh devaluation and provide any sort of basis for investment confidence. How will markets react ? On the principle that what is widely expected is unlikely to precipitate fresh selling I doubt whether a really courageous Budget, however chastening it may be, will set markets on a fresh decline. Gilt-edged stocks would surely hold steady and, after their recent heavy fall, the same should be true of industrial equities. Investors who have seen things through up to now should certainly continue to hold.
English Electric Expansion As expected, there are all the authentic indications of expanding activities in the full accounts for 1951 of the English Electric, Company. In the consolidated balance-sheet an increase in the net amount of stocks and work in progress from £15,203,354 to a new peak of £21,046,196 is flanked by a rise in bank overdraft of over £1,600,000 to £5,861,474. This sub- stantial increase in bank indebtedness has taken place moreover despite the fact that during the year the company received £2,500,000 as the first instalment on its issue of £3 million of Debentures. It is now clear that the subsequent receipt of the £500,000 balance, together with the £2,160,000 proceeds of the recent issue of new Ordinary shares, still leaves the group with some bank indebtedness. One need not be surprised, therefore, that the directors are seeking power to create a further two million Ordinary £1 shares even though no further issue of capital is at 'present con- templated. Last year's increase in turnover was reflected in an increase in group trading profit from £4,085,342 to £4,762,088. Once again substantial allocations are made to reserves and the 15 per cent. dividend is maintained on the Ordinary capital. Quoted around 56s. English Electric Ordinary shares are now yielding just over 51 per cent. On the face of it this looks a reason- able return, having regard to the group's widespread activities, which extend over the production of the Canberra bomber and electrical equipment manufacture of prac- tically every type, and to enterprising management. This return needs to be compared, however, with the yield of just over 6 per cent. now obtainable on the new Ordinary shares of the General Electric Company and the 51 per cent. on the new Ordinaries of Associated Electrical. In my view G.E.C. and A.E.I. are both better value for money at current prices than English Electric.
Motor Merger Surprise The extension of share-exchange terms to holders of the various Preference issues of the Morris and Austin Motor companies under the proposed merger plan has come as a surprise to the City. Nobody is likely to quarrel, however, either with the proposed share-exchange terms or with the general principle underlying the exchange of the Preference shares of the two constituent companies for a 5 per cent. Preference in British Motor Corporation, the new holding concern. That the terms were generous is apparent from the rise in quotations in the Preference issues effected on the Stock Exchange. So far as the company is con- cerned, the extra annual dividend cost, amounting to a little over £24,000, looks trifling in relation to a prospective saving of stamp duty of £650,000 and to the general advantages of the scheme in simplifying the capital structure. My advice, therefore, to holders of the Preference issues is to accept the terms offered. Ordinary shareholders are now informed that the merger company expects to pay a dividend of 52 per cent., barring any unforeseen developments. On this basis the 5s. Ordinary shares of Austin and Morris, both standing at 30s. in the market, are priced to give the high yield of nearly 81 per cent. Whether this is too high or too low it should be easier to see after the Budget, but it certainly looks attractive by comparison with the returns obtainable on several other motor shares whose standing can scarcely be rated higher than that of the largest unit in the motor industry. Rootes' 4s. Ordinaries at 18s. are returning less than 71 per cent, and Standard 5s. Ordinaries at 7s. 6d. yield 71 per cent.
William Whiteley Setback Following the moderate recession in earnings announced by the Harrods group, William Whiteley, the Bayswater stores, now reports lower earnings for the year to January 31st due entirely to the encroach- ment of higher costs on profit margins. In his statement Mr. H. Walter Jones discloses that this company succeeded in achieving an increase in its total sales but that it was insufficient to offset the effect of steep rises in expenses. Trading profits, which included a transfer of £28,720 from contingencies reserve, were down from £153,080 to £135,133. Net profit, after tax, etc., was was £42,040, against £47,529. That is not a heavy reduction but it has called for a further cut in the dividend on the Ordinary capital of William Whiteley, which is rather highly geared. Ordinary stockholders get 7j per cent., against 10 per cent., and the £1 Ordinary units have fallen to 14s. 6d. At this level they are yielding about 10 per cent., but I doubt whether this is the time to buy retail stores shares. This year is likely to witness a further reduction in profit margins and in net earnings.
Rugby Cement Progress To judge from the preliminary figures of the Rugby Portland Cement Company this group continued last year to set up new records of output and sales. Trading profit, including income from investments, rose from £464,990 to £541,356 and net profit, struck after deducting depreciation and Profits Tax but before charging income tax, was up from £293,264 to £317,242. Profit, after Preference dividend and income tax, was nearly £15,000 higher at £146,504, but following their traditionally cautious divi- dend policy Mr. Halford Reddish and his co-directors have been content to maintain the Ordinary dividend at 20 per cent. Once again this is supplemented by a 5 per cent. tax-free payment out of capital reserves, and it is worth noticing that after this distri- bution, which involves £25,000, capital reserves will still stand at over £600,000. It seems a reasonable inference that this tax- free payment will be continued and will form part of the regular total distribution unless exceptional circumstances should intervene. On the basis of the 20 per cent. dividend Rugby Cement 5s. Ordinaries at 21s. 3d. offer the rather low return of £4 12s. per cent., but if one adds in the 5 per cent. tax-free payment out of capital reserves, which grossed up brings the total distribution up to nearly 30 per cent., the return is raised to over 7 per cent. This group, as I have emphasised in the past, has built up a strong financial position and is an efficient cement producer. With demand well assured both in home and export markets the shares look to me a worth-while holding.
Ashton Bros. Yield Until the outlook is clearer one hesitates to recommend cotton textile shares, even after the severe fall of the past six months. It seems to me, however, that some of the shares in this group are well worth watching for their long-term possibilities, especially where current dividends are covered by an ample margin of earnings. A case in point is Ashton Bros., the Manchester firm of cotton spinners and manufacturers. This company has just announced its 1951 results. Trading profits fell slightly from £681,996 to £671,024, but even so net profit, after tax, was equivalent to nearly 210 per cent. on the £216,000 of Ordinary capital. It is not surprising, against this background of earnings, that the board should have decided to maintain the dividend at 15 per cent. and to supplement it, as for 1950, by a 5 per cent. cash bonus, making 20 per cent. in all. This distribution involves a net amount of only £22,680. That may be com- pared with the transfer to reserve fund of £90,000, the allocation to reserve for depre- ciation of stock of £85,000 and the £40,000 which goes to reserve for contingencies. It is not difficult to see that to jeopardise this 20 per cent. dividend rate Ashton Bros. will have to suffer a most severe setback in trading results. The company also presents a good balance-sheet, total asset values behind the £1 Ordinary shares amounting to over £6. From a peak level of 65s. 9d., at which they stood at one time last year, the £1 Ordinaries are now down to 48s. At this level the yield on the 20 per cent. dividend rate is over 81 per cent. Although I do not suggest that these shares have immediate attractions from the standpoint of capital appreciation, I think their long- term merits are now well worth considering.
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