FINANCE AND INVESTMENT
By CUSTOS
THESE are inflation markets with 'a ven- geance. Flying straight in the face of Mr. Gaitskcll's ostensibly disinflationary Budget the market in equity shares has scored the sharpest gains seen for a long time past. Even Mr. Wilson's grim warning on raw material shortages has fallen on deaf ears and investors seem to have decided to give their hopes the benefit of any vague doubts. What does all this add up to ? I think the current mood is complex. Fundamentally, it derives from a widely held conviction—supported by Mr. Douglas Jay's estimate in the House of Commons—that the profits of British industry this year are going to increase. Next, there is an equally strong conviction that a large number of companies will be able to take the increase in Distributed Profits Tax in their stride and will be more —and not less—disposed to raise dividends now that the Chancellor has squarely staked his claim in any increase. I am not suggest- ing, of course, that boards of directors are going to be frivolous in their dividend decisions but simply that, where earnings permit, ordinary shareholders, the suppliers of risk capital, may reasonably expect to come into their own. The sceptic may ask: Will profits rise in spite of shortages ? That, I think, is an appropriate question in the present phase of market exuberance. The answer will only become apparent later this year but investors should obviously make industrial share purchases with caution. The shipping group, which has been enlivened this week by the dividends announced by the P. & 0. Steam Navigation and the Cunard, seems to me to offer as much scope as any. I still feel, too, that the emphasis may shift before long to overseas securities, including gold shares.
The " Pru." and the Pearl Both those giants of the insurance world —the Prudential and the Pearl—have issued their annual reports this week. The figures of income and assets are in each instance impressive. At £608,270,214 total assets of the Prudential increased last year by nearly £38 million and easily reached a new peak. In the case of the Pearl, assets rose by nearly £9 million to a new record of £190,230,191. On the income side the Prudential received premiums in its Ordinary Life branch of £32,500,000 ; in the Industrial branch pre- miums topped £40 million and in the General branch there were premiums of over £8 million. After allowing for out-payments it is clear that the investment of these large additions to funds creates difficult problems. Neither the Prudential nor the an solved its investment problems 'astir year by attempting any large-scale switch out of fixed interest securities into equity stocks. On the contrary, the outstanding feature of the Prudential's balance-sheet is the increase which' took place in holdings of Debenture stocks, which rose by nearly £20 million to just over £73 million. Holdings of Preference stocks were increased by nearly £2 million to £46,706,087, while the increase in holdings of Ordinary stocks was limited to £3,700,000 at £62,762,806. Another noteworthy feature in the balance-sheet is that the Prudential's loans on house property in the United King- dom rose steeply from £30,049,437 to £35,222,716. Mortgages on property inside and outside the United Kingdom were up from £8,832,578 to £10,246,594. There were similar changes, although on a smaller scale, in the portfolio of the Pearl Assurance. In this case holdings of British Government securities were over £2 million down last year at £79,320,453, but this movement was counter-balanced by an increase in invest- ments in Dominion and Colonial Govern- ment securities, which were up by over £2 million to £10,082,674. There was little change in the Pearl's holdings of Ordinary stocks at £25,459,295, against £24,958,678.
I have often emphasised the investment merits of the shares of the leading insurance companies and the latest reports underline the strength of these two predominantly life concerns. Prudential " B " shares at 85s. are yielding just under 4 per cent., and the return on Pearl shares at £21 is just under 5 per cent. While these shares would not escape the effects of any really catastrophic fall in gilt-edged prices they seem to me to contain an important equity element, which makes them a useful inflation hedge. Both Prudential and Pearl are good invest- ment holdings.
Baldwins (Holdings) Plan
My recent reference to the investment merits of Baldwins (Holdings) 4} per cent. Preference shares around 19s. 6d. has proved timely. This company has avoided the temptation to continue in existence as a large investment trust and elected to go into volun- tary liquidation. This means that the 44 per cent. Preferences will be paid off at 21s. Holders should now see things through and take their modest tax-free profit in the coming pay-out. The 4s. Ordinary shares, to which I have also called attention in the past, come out wall, although holders will have to wait some time before they get their money. The board's plan is to distribute the great bulk of the steel compensation stock- 1.6,236,800 out of a total of £7,186,800—to the Ordinary stockholders in the proportion of 10s. nominal of Steel stock for every 4s. Ordinary unit. This distribution on the present price of Steel stock in the market is worth about 9s. 8c1. On top of that Ordinary stockholders are to receive a residual pay- ment, which is estimated at approximately 2s. This brings up the total expectation of the Ordinary stockholders to about I Is. 8d., against which the units are now quoted in the market at 10s. IOW. The discount is, of course, a measure of the cost to a new buyer, which is roughly 4d. a share, and the uncertainty as to the waiting period before actual payment is received. In my view holders of the Ordinary stock, like the Preference shareholders, should not sell now but should hold on for the cash repayment.
A Shipping Equity
There is no pause in the sharp rise which Is taking place in tramp freight rates. The Index number compiled by the Chamber of Shipping of the United Kingdom has jumped from 164.7 in February to a new post-war peak of 180.6 for March. In January it was 151.9. Much more significant for purposes of comparison, the average index for the whole of 1950 was 84.0. While I have emphasised here on several occasions that it would be unwise to look for the main- tenance of current freight rates indefinitely at today's unusually high levels, it is, never- theless, clear that the tramp ship owners must now be reaping handsome profits, even allowing for the increase in costs. The latest indication of the prosperity of the industry is provided by the interim dividend announcement of the Dene Shipping Com- pany, which operates three tramp vessels. This company has just announced an interim of 74 per cent. on account of its financial year which ends on July 31st, 1951. In each of the 12 preceding years there has been an interim of 5 per cent. supplemented by a 5 per cent. final, making a total of 10 per cent. On the basis of the increased interim it is obviously a safe assumption that, barring unforeseeable changes in the freight market situation, there will be a final of at least 74 per cent., bringing up the total to a mini- mum of 15 per cent. The 10s. Ordinaries are now quoted around 28s. 3d. In view of the company's strong assets position and the promising earnings prospects I regard them as an attractive purchase in the shipping market.
A Textile Under Par
So far, the rise in industrial equity shares has been most marked in what might be termed the " blue chips," i.e., the shares of the leading companies in which there is a free market. There can be little doubt, how- ever, that as time goes on buying will over- flow from the leaders into some of the less well-known shares which offer attractive earnings yields. Among these I would in- clude the £1 Ordinary stock units of Com- bined Egyptian Mills, the Lancashire cotton spinners. In each of the past two years this company has paid a dividend of 6 per cent. but earnings have amounted to 25 per cent. Following a prudent distribution policy the board has ploughed back £250,000 to reserves in each of these years. General reserve now stands at £500,000, against the issued Ordinary capital of £2,283,381. There is also a stock contingencies reserve of another £200,000. Like other textile con- cerns, this company faces the problem of securing adequate raw materials, but it is noteworthy that in his statement last Novem- ber the chairman indicated that so far as their raw cotton supplies were concerned the board had every confidence that no insurmountable difficulties would arise during the coming year, and that the required amount of cotton would be forthcoming to meet the company's needs and any hopes for an increase in output. At one time last year the £1 units were quoted at 18s. 9d. They can now be purchased around 16s. 6d., at which they are offering the useful dividend yield of over 7 per cent. and an earnings yield of over 30 per cent. They should be worth putting away for a gradual improve- ment towards par.
Previous page
