FINANCE AND INVESTMENT
By CUSTOS IT is significant of the uncertain mood of investors that there has been no marked reaction this week to any of the develop- ments which, in some circumstances, might have set prices moving. In the gilt-edged market the publication of the October gold and dollar reserve figures—distinctly encour- aging in themselves—merely served to keep prices firm. On the other hand, the announcement of a £60 million loan to be raised directly from the public by the Transport Commission had no depressing effect. Even the major news from the political front—the Republican victory in the United States—has brought no appreci- able changes, unless one could so describe the recovery of dollar securities in the London market. The plain truth is that investors are still uncertain about the economic outlook and—in my view sensibly are 'adopting an appropriately cautious policy. For the present I think we are faced by mildly disinflationary influences more favourable to fixed interest stocks than to any bold buying of industrial equity shares.
Wall Paper Setback Shareholders in Wall Paper Manufac- turers received a plain warning in the pre- liminary figures of a substantial setback in this company's trading fortunes. In the full accounts for the year to June 30th they are told that for the first time for many years the manufacture of wallpaper itself proved unprofitable4owing to higher costs and reduced sales m the home market. The company's export trade, although well maintained until the last few months of the year, also suffered and is still suffering from the restrictions on imports imposed by the Dominions and other countries. Group trading profits have fallen from £4,400,000 to £2,500,000, and at the balance-sheet date, although creditors were down by about £400,000 to £2,400,000, group stocks were nearly £2 million up at £7,900,000, obviously reflecting the reduction in demand. This increased holding of stocks has caused a temporary shortage of cash, which is down by about £1 million to £527,548, while bank overdrafts have risen by about £1 million to £1,104,444. The group's liquid resources, however, are still substantial, in that there is a large portfolio of marketable invest- ments. At June 30th the market value was £3,715,760, showing a depreciation below book cost of £741,158, covered as to £400,000 by a specific investment reserve and much more than covered by other reserves. With a view to stimulating sales in the home market the group has made some reduction in selling prices, and steps have also been taken to reduce 'costs. It is fortunate from the shareholders' standpoint that the 124 per cent. dividend rate has been covered by a very large margin of earnings, and even on the latest results this rate is comfortably maintained. At 44s. 9d. Wall Paper Manufacturers' Deferred £1 units are quoted to return 5} per cent. In view of the group's strong finances and the wide spread of its activities these shares should be held for recovery.
Trust Capital Scheme One had hoped that in these enlightened days one had seen the end of capital recon- struction schemes which do something less than justice to the prior rights of Preference shareholders. It is the more surprising that a plan should be brought forward by the Tyre Investment Trust, whose board, headed by Mr. John Govett, includes several leading figures in the investment trust movement which, in my view, has nothing to commend it from this standpoint. It is even more sur- prising that the scheme should have received the blessing of a joint committee represent- ing not only the investment trusts but the insurance companies. I would be the last to deny the importance of expediency in formulating capital reconstruction schemes, in the sense that sacrifices have to be made and that there must always be some give and take to get a scheme through at all. In this case, however, it seems to me that the sacri- fice is imposed unfairly as between the three classes of shareholders involved. Here is a company which has its investments almost evenly divided between a . large Ordinary shareholding in Dunlop Rubber and a well- spread portfolio in other securities. The[ latest valuation of £1,246,920 covers the £1 million of 7 per cent. Preference capital by a reasonable margin. On the side of income the 7 per cent, dividend on the Preference shares, which will have the first claim, is also covered by about 1 der cent. Yet merely to bring the two classes of junior capital back into the picture—as things are they have no hope of any dividend in the foreseeable future—the scheme proposes to ask the Preference shareholders to agree to the extinction of all their dividend arrears, which amount to about 8s. 9d. net per share. Is this fair ? It could only be so, in my view, if it were really in the interest of the Prefer- ence shareholders to have some sort of capital reconstruction scheme. I cannot see why it is. At present every penny of available income has to be paid to the Preference holders and, as I have said, current revenue is sufficient to cover a regular 7 per cent. dividend and to allow of some modest pay- ments on account of the heavy arrears. To give the Preference shareholders some inducement to agree to a scheme one must surely offer them something better than what they are in a position to insist upon already. Tyre Investment 7 per cent. Cumulative £1 Preference shares are now quoted around 17s. Although for the past Year their dividend was restricted to 6 per cent.—in my view a bad decision on the part of the board—they should be worth holding.
Brick Investments I referred some few weeks ago to the speculative attractions of the £1 6 per cent, Cumulative Preference shares of Brick Investments. This company's full accounts for the year to June 30th confirm my expectations in showing a further improve- ment in earnings. Investment income has risen from £9,773 to £11,886, and net profit, after tax, is up from £6,287 to £7,248. More- over, the position of the Preference shares from the capital standpoint is shown to be quite strong, in that investments taken at current market prices, plus the liquid resources, cover the £164,322 of Preference capital by a reasonable margin. As so often happens when there are heavy accumulated arrears of Preference dividend and the company's fortunes have turned the corner, the directors are anxious to dispose of the Preference arrears so as to open up the way for a resumption of Ordinary dividends. In this instance the inducement offered to the Preference holders is 3d. a share free of tax, to be paid in cash, and the distribution of two Ordinary 1 s. shares for every Prefer- ence share held—in all cash and shares Worth approximately 2s. 3d. This compares with the 2s. 6d. net of dividend arrears. While I would not suggest that this is a grossly unfair proposal, I regard the offer to the Preference shareholders as somewhat ungenerous. This company, with dividends now flowing in strongly from the brick- making and other concerns in which it is largely interested, should be able to pay off the Preference arrears in full within a com- paratively short space of time. Preference shareholders are, therefore, well placed to adopt a waiting policy, and my advice to them would be to stick out for rather better terms than those now offered to them if they • are to accept any speeding-up plan. Quoted around 15s. Brick Investments 6 per cent. £1 Preferences with four years' dividend . *rears should certainly not be sold. The cipmpany's Is. Ordinaries standing at just ` under par have speculative long-term attrac- tions, whether or not a scheme goes through. It is quite plain from the latest accounts : that revenue is likely to be higher in the next year or two than for the year to Juno `130th, 1952.
Previous page
