FINANCE AND. INVESTMENT By CUSTOS No perceptible response to the
Common- wealth Conference communiqué has yet been seen in the stock market, except for some slight disappointment at the lack of specific proposals for restoring convert- ibility of sterling and the absence of any plea for a higher gold price. The market in general has probably been influenced more by the large impending Anglo-Iranian Debenture issue, which cast a shadow in advance, and by the issue of some £32,000,000 of Treasury 31 per cent. stock as compen- sation for nationalised collieries.
Few investors can have expected the Con- ference to produce a sovereign remedy for the dollar shortage or for the early attain- ment of convertibility, but some no doubt hoped that the communiqué would give more detailed clues to the market future. The broad aims—economy, disinflation, greater savings and the development of food and raw material resources in the Common- wealth—are welcomed in the City, but the only paths by which these objectives can be reached are rough and stony. If the City's response has been restrained, it is largely because it is looking for something more than good resolutions.
The Price of Gold One good result of the conference is that the Commonwealth Ministers are now fully versed in the problems of the sterling area as a whole and are substantially in agree- ment about the main solutions. They may not find it easy, however, to convince their own legislatures of the overriding need to ensure the solvency of the sterling group and to induce them to refrain from diverting scarce resources and capital into secondary industries and costly schemes of social welfare.
As for the omission of any reference to the dollar price of gold, this was no doubt deliberate. The question was certainly dis- cussed, but apparently it was thought that any special plea for a higher price might prejudice negotiations with the new U.S. Administration. In turn, perhaps, Mr. Eisenhower and his lieutenants may refrain from expressing unalterable opposition to a change in the price until they have examined the question in all its aspects.
Hawker-Siddeley Expansion Some idea of the financial strain of the air- craft and aero-engine building programme is conveyed in the powers sought by the Hawker-Siddeley group to raise its external borrowing limit to £16,000,000. The parent concern's borrowing limit is now £5,000,000, but the borrowing powers of most of the subsidiaries are not restricted. The un- restricted powers of the subsidiaries are to be cancelled in favour of the overall group limit of £16,000,000, while the limit for permanent borrowing is to be £10,000,000. This change will give the parent company greater flexibility in its capacity as group banker. The Hawker-Siddeley group is the biggest in the industry, and its " super - priority " products include the Hawker Hunter supersonic jet fighter, the Gloster Javelin twin jet Delta fighter, the Avro Vulcan four-jet Delta bomber (which may later have an airliner counterpart) and the powerful Armstrong Siddeley Sapphire jet engine.
The group accounts of Hawker-Siddeley at the end of July show a rise of £7,675,000 to £24,239,000 in stock and work in progress, and a further rise apparently is expected next year. If it were not for Government help provided by accelerated progress payments, the burden of financing work in progress would be even greater. Trading profit is £1,454,000 higher at £7,955,066, but deprecia- tion and reserve for replacement take £2,593,748, against £2,104,522, while tax swallows up £3,768,563, compared with £3,280,014, leaving net profit £473,035 higher at £1,383,436. Even this rise brings _no 'benefit to the Ordinary shareholders, whose unchanged 10 per cent. dividend requires only £305,673. The £1 Ordinary shares are now standing at 37s. 9d. to yield about £5 6s. per cent. This is not over-generous, but the payment is amply covered by earnings, and the outlook seems favourable for at least three years.
Diamond Dividend Raised • There have been two developments of interest to shareholders in the De Beers group since I wrote about the shares last week. First, the dividend on the Ordinary shares of Consolidated Diamond Mines, of which 94 per cent. is held by De Beers, has been raised from 125 per cent. to 150 per cent. for the year. This will provide £646,000 additional income to the parent, which is equal to nearly 16 per cent. on De Beers' Deferred shares. Of itself, this increase need not indicate a higher payment by De Beers, but with diamond sales at a record level the directors may feel disposed to put the dividend up again.
The second development has been the separation of the Diamond Corporation (which is controlled by De Beers) into two companies by the formation of De Beers Investment Trust with a capital of £12,000,000 in £1 shares. The Diamond Corporation's activities will be confined to the diamond trade, its main purpose being to safeguard the stability of the diamond industry, while the new company will take over the financial side of the Corporation's business. In this role it is expected to develop into a large and influential financial house, " which will play an active part in the national develop- ment of the Union of South Africa " and in turn be a source of strength to De Beers and its associates.
Roundabouts and Swings On the assumption that the new trust will invest large sums in the new O.F.S. gold mines, there has been some criticism on the ground that the approval of De Beers' shareholders should have been sought to the use of large resources in this way. This criticism may be just. If, however, these resources are employed in the form of short- term loans, with options to convert into Ordinary shares of the leading O.F.S. mines (many of which, incidentally, will also produce uranium), the new development could be of considerable potential benefit to De Beers. The two industries—gold and diamond mining—are to some extent com- plementary. When trade is booming and prices are rising, De Beers is prosperous, but gold mines then suffer from a fixed Brice and higher production-costs. When trade is depressed and prices decline, diamond sales shrink, but the gold mines benefit from a reduction in costs. The roundabouts and swings analogy may not be perfect, but there is something to be said for setting off one risk against another.
Asbestos Strength Turner and Newall, the asbestos giant, which mines, manufactures and distributes asbestos, magnesium and allied products, is a valuable source of revenue for the Chancellor. Consolidated trading profit for the year to September 30th, 1952, was £1,007,000 higher at £14,332,938, but provision for tax mopped up £1,441,000 more at £8,001,072. The depreciation charge was also higher, so that net profit fell by £788,135 to £3,765,165. The year's dividend on the Ordinary stock, how- ever, is raised by 5 per cent. to 25 per cent. ; but the total payment requires only £700,692 —less than 9 per cent. of the sum taken by the tax-collector—and is covered about five times by earnings.
The directors say that a downward trend in volume, which became apparent in the second half of the year, has since continued. While the current year's results should be satisfactory, the Board do not expect that the very high level of the past two years will be maintained. Despite this warning, the danger of a reduction in dividend seems almost negligible in the light of the com- pany's immense strength. At the current price of 99s., including 2s. 11d. net dividend, the yield is over 5 per cent., which is reason- able enough for one of the veteran " blue chips " of the market. When the 100 per cent. scrip bonus shortly to be issued takes effect, the stock units may attract more attention. Ex dividend and bonus, the equivalent of the present price would be 48s. 6d. but the equivalent dividend, of course, would be only 121 per cent.
Ashton Brothers In spite of recent signs of recovery in the cotton trade it is clear that most cotton textile companies will show a considerable drop in earnings for 1952. Even Ashton Brothers, one of the soundest of the vertical concerns, halved the interim Ordinary dividend at 21 per cent. last June when the outlook seemed particularly bleak. This step may perhaps have been over-cautious, since earnings on the Ordinary shares in both 1950 and : )51 exceeded 200 per cent., and the distribution of 20 per cent. on the Ordinary for each of those years was covered more than ten times, From a high level of 68s. 3d. in 1951 these £1 Ordinary shares have since been down to 35s. and are now around 37s. 6d. At this price the yield would be £10 13s. Od. per cent. if the pay- ment for the year is again made up to 20 per cent. On a 15 per cent. basis the yield would be 8 per cent. The chief attraction of the shares in my view, however, lies in the strong asset cover. The 1951 balance-sheet showed net liquid assets—after deducting all liabili- ties, future tax, Debentures and Preference shares—amounting to 84s. for each Ordinary share. Even allowing for a possible loss on the stocks the net liquid asset value should be considerably more than the current price of the shares. Including fixed assets, the shares have a net asset value of 123s.
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