FINANCE AND INVESTMENT
By CUSTOS HOLIDAY influences have now joined the uncertainties of inter- national politics in imposing strong restraints on new investment. In consequence, London did not take its cue at the beginning of the week from Wall Street's firm response to Mr. Truman's emergency programme. Markets are bound to remain cautious on both sides of the Atlantic while the international situation remains so inflam- mable, but investors are keeping commendably calm. Little stock comes on offer and some of the bolder spirits are on the look-out for good buying opportunities on dull days. Discrimination must provide the watchword, especially in industrial equities, now that some companies are faced with raw material shortages, but the chances are that prices as a whole will improve unless the inter- national horizon gets even darker than it is now Inflationary pressures, accompanied by more liberal dividend policy, are powerful sustaining factors for the equity share market.
• Turner and Newall Decision
City hopes of a modest increase in the dividend of Turner and Newall, the asbestos combine, are now fulfilled. This company has joined the lengthening ranks of those which are adopting a more rational view of dividend limitation and passing on some small part of increased earnings to the Ordinary stockholders. For the year to September 30th the Turner and Newall board are raising the Ordinary dividend from 15 per cent. to 174 per cent. They are also proposing a 24 per cent. special bonus to mark the thirtieth anniversary of the formation of the group and the twenty-fifth anniversary of its becoming a public company. Only a glance at the latest profit figures is required to see that the stepping-up of the Ordinary dividend rate does not involve any departure from the strict financial standards to which this company's distribution policy has conformed over a long period of years. Net profit, after tax, has risen from £2,699,494 to £2,960,916. Consolidated net profit, before tax, is up from £6,274,079 to £7,154,469. The increase in gross earnings was even sharper, the latest figure having been struck after charging £1,357,774, against £917,458, for depre- ciation, and after deducting £700,000, against £200,000, for inter- company profits on unsold stocks. Against the background of figures such as these the extra £73,000 net required in raising the dividend from 15 per cent. to 174 per cent. looks almost negligible. Moreover, the board is allocating £480,000 to specific reserve against stock-in-trade, £150,000 for future taxation and 000,000 to general reserve. The amount carried forward is being raised horn £852,592 to £1,075,864. it is clear that very large sums are again being ploughed back into the business, as is appropriate for company faced by heavy capital expenditure. At 86s. Turner and Newall £1 units are now yielding only is. over 4 per cent. on the 174- per cent. dividend. If the extra 24 per cent, special dividend, raising the total to 20 per cent., is brought into account the yield is raised to over 4-1- per cent. It seems to me that, even allowing for the strong cover behind the dividend, the units are now fairly valued. They still constitute a "blue chip" industrial investment, put there may not be much scope for early capital appreciation.
Lancashire Cotton Results
Another leading industriareoncern which has seen fit to make a modest increase in its dividend is the Lancashire Cotton Corpora- tion. In this instance the Ordinary dividend is being raised from 10 per cent. to 124 per cent., but the higher rate is payable on a capital which has been increased by just over £1 million by the new issue of shares made in September, 1949. On the existing capital the 1948-49 net profit of £1,435,992 was equivalent, after 'charging depreciation of £450,000, to about 45 per cent. The 1949-50 net profit of £2,068,690, after charging £500,000 for reserve for replacement of fixed assets, is the equivalent of over 70 per cent. It is apparent, therefore. that the 24 per cent. increase in the
Ordinary dividend still represents a very conservative distributio of available profits. In the market a higher payment had bee confidently forecast, with the inevitable result that the £1 Ordinar units had been bought spculatively in anticipation of the results Profit-taking has brought the price back from 42s. 6d. to 41s. 6d. at which level the yield on the £1 units is 6 per cent. Whethe one should deduct the depreciation charge in arriving at the earn ings available for Ordinary dividend is a debatable question, b taking the earnings of over 70 per cent. as calculated on the strict basis, the earnings yield of approximately 35 per cent obviousl makes the shares look good value. So far as one can judge, th prospects of the Lancashire spinning industry still appear brigh although spinners are now faced by a number of difficult problem The nature of these problems is stated clearly in the annual revie of the chairman of Amalgamated Cotton Mills Trust, which, lik Lancashire Cotton, has enjoyed a successful year. He takes confident view of the current year's outlook, subject to the main tenance of demand at the higher level of selling prices brough about by the sharp increase in raw material prices. He also remind his stockholders of the greatly increased burden of financing stock of raw cotton. Both companies have recently fortified their finan cial position by raising new money, but it would be foolish t ignore the possibility that further capital may be required in th fairly near future.
Steel Unscrambling Problems Sir Ellis Hunter, chairman.of Dorman Long and Company, wh is also President of the British Iron and Steel Federation, has don well to call attention in his annual statement to Dorman Lon stockholders to the financial problems involved in unscramblin the Iron and Steel Act. Although both opposition parties in th House of Commons have declared their intention of returnin iron and steel to private ownership if an election result shoul justify such a course, there has so far been surprisingly little elud dation • of how this laudable object would be achieved in practi Sir Ellis Hunter would not claim to solve the problems, but a least he exposes them. To return the industry to private enterpri would obviously not be difficult, but to hand it back to the origina owners in the financial sense looks a much more formidable tas
What appears to be in mind is that a careful record must b kept of the shareholders on the various companies' registers o February 15, the proposed vesting date. Such shareholders woul have rights in any financial scheme for handing back the indust from the British Iron and Steel Corporation, the vesting body One can easily imagine the sort of difficulties which would be boun to arise. Between now and February 15 many iron and stee shares will be bought by institutions as a backdoor into gilt-edged Such buyers will be content with their bargain and might not tat' kindly to any subsequent suggestion that they should exchan• their Iron and Steel Stock for obviously much more speculativ investments. I also find it difficult to imagine the kind of prospect on which all the various holdings, both Preference and Ordinary, the long list of vested companies would be offered back to th public. Doubtless these problems are being considered, and wit powerful City backing for a purchasing syndicate could be solved
South Durham Steel
Meantime, iron and steel shares in the companies scheduled fo take-over next February are selling at. discounts on take-ove prices, ranging between 2 per cent. and 5 per cent Bearing mind the possibility, which now seems remote, that vesting ma) not, in faCt, take place, and the further chance that if the industry is nationalised it may subsequently be returned to private owner Ship, I cannot see that iron and steel investors need feel any grea anxiety to sell. In expressing this view r am clearly implying tha the earnings and dividend outlook for the industry under privat ownership in conditions of accelerated rearmament would be good. South Durham £1 Ordinaries around 31s. 6d. look attractive front this standpoint. They yield 64 per cent. on a well-covered dividend and their take-over price is 32s. 11d. If nationalisation takes place, a buyer is all-square, allowing for brokers' commission and transfee duty. If it does not, the shares should improve.
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