FINANCE AND INVESTMENT
By CUSTOS INVESTORS in these days are tough folk. Well schooled in fortitude and always, it seems, prepared to give hope the benefit of many doubts, they have refused to allow even the body-blow of the Government's dividend control proposals to shatter their resistance. Once the first heavy impact had been taken—and the first sharp marking down of quotations had been completed— the only sellers were the " bull " speculators who simply had to cut down commitments • and the " bear " speculators whose joy it is to take a profit off the " bulls " on their way out. Many Stock Exchange dealers doubtless welcomed the opportunity to buy a little stock at low prices but the volume of stock on offer was never very substantial. For one reason or another the average investor came to the conclusion that, bad as the blow was, he would not sell good equity shares. In consequence, markets have performed the surprising feat of regaining about one-half of the ground' lost immediately following Mr. Gaitskell's bombshell.
Too Bad to be True This decision to see things through—the policy I urged on investors last week— derives mainly from, the undisputed feeling that a three-years' dividend freeze, at least in the severe form outlined so far—is just too bad to be true. Even if there is no early election and Socialist defeat, the scheme is so arbitrary and so full of injustices that it is bound to be substantially amended. For most investors, however, the basis of hope is mainly that there will be an early change of Government, leading to a square deal for equity shareholders. Then there is the back- ground factor essential to any favourable view of the outlook for ordinary shares— the continuance of inflation in such a form as to ensure the maintenance of profits at a high level. Nothing in Mr Gaitskell's latest effort to counter inflation has assured the vast majority of investors that inflation is yet under effective control. On the contrary, mosti people feel that as rearmament gets undyr way inflationary pressures may well gather strength. This view is certainly supported by the remarkable buoyancy of industrial activity in the United States flanked by an equally remarkable rise in common stocks on Wall Street. While I doubt whether key commodities, such as rubber, tin and wool, will regain the peaks reached early this year, I see no likelihood of a further severe fall just yet even if there is a satisfactory peace settlement in Korea.
No Stimulus for Gilt-edged
It is doubtless this sort of view which explains not only why Mr. Gaitskell's blow at equity shares has been less devastating than was at first feared but why it has failed to provide any real stimulus for the gilt- edged market. Gilt-edged prices, it is true, are showing signs of firmness and may be due for a mild rally, but investors, institu- tional as well as private, have shown no eagerness to switch out of ordinary shares into Government securities. As I see it, they are not likely to do so until they are con-
vinced that inflation is really under control. At the moment gilt-edged stocks are being adversely affected by the dividend freeze through its reaction on investment confi- dence. The City feels, with good reason, that a Government capable of inflicting such a spiteful blow at risk capital with such damaging effects on the raising of new capital for industry, has forfeited its claim on good credit rating.
Shipping Share Deal How will the dividend freeze be applied to recovering companies which have just turned the corner ? According to the Government's White Paper companies in this category will be allowed to pay only 5 per cent. One wonders, therefore, whether the deal just announced, through which the Dene Shipping Company has bought 380,866 of the 10s.- Ordinary shares of Silver Line from the Treasury, was concluded before Mr. Gaitskell announced the freeze in the House of Commons. If it was, then it seems to me that the buyer may have a legitimate grievance, in that the Treasury negotiators seem to have been playing with loaded dice. Silver Line Ordinaries are a case, par excel- lence, of a share which is unjustly treated and severely hit by the Government's divi- dend control proposals as they now stand. For the past four years this company has paid no Ordinary dividend, but under the energetic direction of Mr. Henry Barra- dough, its chairman and managing director, it has taken long strides towards financial strength and prosperity. It has now reached the stage at which the Ordinary shareholders could .well expect to receive quite a sub- stantial dividend after the lean years, and it is on this confident expectatiqn that the shares have recently fluctuated in the market between 15s. and 20s. I do not know the terms on which Mr. Henry Barraclough, who is chairman not only of Silver Line but of Dene Shipping, has bought this block of shares for the Dene Company from the Treasury but it is obvious that the shares can only be worth their present price on the • assumption that if the freeze proposals are brought in this company will get some special treatment. Having sold the shares, the'Treasury is clearly under a strong moral, if not legal, obligation to make some special dispensation to the buyer. Meantime, it is a remarkable indication of investors' faith in the financial acumen of the Silver Line chair- man that the announcement of the deal has been followed by an improvement in the shares of both companies. Dene Shipping 10s. Ordinaries have moved up from 24s. to 26s. and Silver Line 10s. shares are quoted around 16s. 6d., against 15s. 3d. I have not changed my opinion that both these shares are excellent holdings which should see higher levels.
Another Property Deal ?
Having recommended in the past both the 41 per cent. Convertible £1 Preference shares and the £1 Ordinary shares of Associated London Properties, I note with satisfaction that market quotations have now reached a shilling or two over par, following the announcement of " enquiries" which may result in a large-scale deal. The ASsociated London Properties. directors, unlike the boards of other companies which I could name, have adopted what, in my view, is the right course in intimating that preliminary moves have taken place, which may lead to an offer for the whole of the company's share capital. They do not specifically advise shareholders not to sell but content themselves by reminding share- hcilders that they should have the possibilities of a purchase deal in mind before disposing of Aheir shares. The plain inference is that, if a deal materialises, shareholders should come out reasonably well. At this stage the identity of the individual or group behind the enquiries " is not disclosed, but in the market it is regarded as a strong probability that a deal is contemplated by the go-ahead Land Securities group, in which Mr. Harold Samuel is the moving spirit: This group has made rapid progress in recent years by out- right purchases of other important property undertakings. What should Associated London shareholders do ? Since the board's announcement was made, all four classes of shares have moved up appreciably on the Stock Exchange, the sharpest rises being in the 41 per cent. Convertible Preferences and the Ordinary shares. Taking a line through the book values of the properties in the balance-sheet I should expect that, if an offer is made, the holders of these two classes of shares will get something more than the current market quo on. The risk, of course, is that there malt, after all, be no deal, in which case the price would be bound to slip back, though probably not to the old level of under par. The Associated London undertaking, with its properties well spread over office buildings and shops, factory buildings and flats, which include Marsham Court and Westminster Gardens, is clearly a tempting prize to any buyer. It should be well worth while for shareholders to await events.
Safe from the Freeze
Now that equity shares have at least temporarily been robbed of much of their glamour, investors will naturally turn towards fixed-interest stocks, safe from the dividend freeze, offering good yields and the prospect Of some improvement in capital value. Among these I would certainly include the 7 per cent. " A " £1 Preference shares of Whiteaway, Laidlativ, the export merchants. These shares, whose merits were outlined here on July 6, can still be bought around 18s. 6d. to give the generous return of roughly 7+ per cent. Only a glance at the company's latest balance-sheet is needed to show that the Preference capital is covered as to assets by a very large margin. At February 28th net liquid assets alone amounted to £1,146,111 and included £640,000 in cash, of which over one-half was free from exchange restrictions. On net liquid assets the whole of the company's Preference capital was covered nearly twice. Apart from liquid resources, the company has fixed assets carried in the books at another £440,000. On the side of earnings the cover shown in the latest figures is about 3+ times, after calculating profits on a conservative basis. These Preference shares should improve to a shilling or two over par.
Previous page
