FINANCE AND INVESTMENT By CUSTOS
HAVING called for a severe Budget the City will not com- plain now that it has got one. True, the castigation is not applied precisely over the area advocated, but most people feel that at this stage, when the war is barely eight months o:d, the Chancellor has introduced the appropriate restraints. His estimate of total expenditure is, of course, very tenta- tive, and there would have been no surprise if he had given us a much higher figure than £2,667,000,003. Of this he hopes to raise £1,234,000,000 out of revenue, leaving £1,433,000,000 to be met by borrowing. Thus, he throws 45 per cent. of the burden on to revenue, and 55 per cent. on to loans, a reasonable compromise which should not impose too great a strain on the nation's genuine savings. For his additional revenue the Chancellor is relying mainly on well-tried instruments—income-tax, tobacco, beer and match duties, and the Post Office, with a new Purchase Tax to follow. Nobody will quarrel with these changes, all of which will help to achieve the desired end of diverting resources from non-essential to war purposes. I feel, therefore, that the City is right in assessing this Budget as good for gilt-edged stocks. The inflation danger is being combated and the Treasury is obviously determined to borrow only genuine savings on cheap terms. So long as official policy, in the economic as well as the purely financial ficld, is vigorously applied along these lines, there need be no serious inflation or rise in interest rates.
INDUSTRIAL DIVIDEND LIMITATION
What of the outlook for industrial ordinary shares? It is dangerous to generalise, but it is clear enough that the chances of any substantial increases in dividends are getting more and more remote. I have emphasised in recent weeks that only very few of the companies which have been reasonably prosperous in the 1936-39 period were likely to raise their dividends. Such scope as did exist was mainly to be found in the small group of companies which have stood to gain from Excess Profits Tax concessions. Now the Chancellor promises to give special treatment to the companies which were abnormally depressed or in the development stage in the standard period, but at the same time he springs his big surprise in the shape of a statutory limitation of dividends. No public company, it seems, is to pay a bigger dividend than the highest rate actually paid in any of the three pre-war accounting years, there are to be no issues of bonus shares, and companies which were badly placed in the stipulated three-year period will be allowed to pay up to 4 per cent. on the ordinary capital.
While everybody realises the need for conserving resources, I can see a good deal of friction and unfairness resulting from this particular method of ensuring it. What of the companies whose accounting year ends on September 30th, or October 31st? Their last financial year covered only a month or two months of war and many ra'sed their dividends. Will they now be forced to reduce them? What of the companies which paid small cash dividends and sub- stantial capital bonuses? One could multiply the cases where any arbitrary application of the proposed limit would operate very harshly. No doubt there will be concessions, but the broad effect seems to be to diminish the attractions of most equities from the capital appreciation standpoint and to underline, by comparison, the merits of gilt-edged and fixed interest stocks. Of the speculative groups which come out relatively well the most important are home rails, Kaffir and diamond shares, and the stocks, which may include debentures and preferences, as well as ordinaries, of companies, such as Argentine rails and textiles, which bare been abnormally depressed in recent years.
RAIL COSTS AND CHARGES
Here at last is the increase in railway charges, and now tbiq it has come not even railway stockholders seem very enthusiastic. For one thing the extent of the rise in costs and of the necessary adjustment of charges has taken most People by surprise. The question is even being asked
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FINANCE AND INVESTMENT
(Continued from page 609) whether, if this sort of thing is to continue, the whole agree- ment will not be thrown into the melting pot. This seems to me rather an alarmist view. After all, it is the Gove-n- ment's duty to hold down the cost of living and wages co,ts, and if that is achieved there is no reason why railway charges should be raised substantially after the to per c._nt. increase has come into force.
Whether the companies will succeed in retaining the whole of the benefits of the increase in traffics is another matter. Obviously, there is a time lag in the adjustment of charges to rising costs. I feel, therefore, that even allowing for the substantial rise in traffics—it amounts to £9,750,000 in the first eight months of war—it would be unwise to look for anything above Stage 2 earnings (i.e., guaranteed minimum plus L31 millions) for 1940. That is good enough to justify higher price S in the home rail market, and it is significant that stocks like L.M.S. 1923 preference and L.N.E.R. first preference have risen two or three points this week. Even now they are yielding over 71 per cent.
DUNLOP RUBBER OUTLOOK
At this week's meeting of the Dunlop Rubber Co. the chairman, Sir George Beharrell, emphasised many of the points which had emerged from the annual accounts. He told shareholders that, even taking the turnover of the home companies alone, direct Government orders represented only 14 per cent. last year. If the export trade is also included, the proportion is brought down to a mere 71 per cent. In recent months Government orders have, of course, increased, and this is one of the reasons why stockholders are asked to be cautious in their estimates of the 1940 results. As is well known, the profit margin on war work is smaller than on normal business, and Sir George described it as being actually below what could be regarded as adequate for sound trading. If to this factor be added the possible difficulties arising out of shortages of labour and materials and the rising burden of taxation, it is clear that this year's earnings are not likely to exceed the large figure achieved in 1939.
Dealing with the group's export trade, Sir George cited some really remarkable figures. Profits from this section were nearly nine times greater than in 1938 and were responsible for over half the increase in total profits. This expansion was achieved in spite of increasing restrictions on markets through currency difficulties. Speaking so soon after the Chancellor's Budget speech, Sir George was naturally reluctant to express any definite view as to the company's position in relation to the limit imposed on ordinary divi- dends. On what appears to be a strict interpretation of the Treasury's proposal, the calendar year 1939 could not he ranked as among the three pre-war accountancy periods_ It would seem, therefore, that the highest dividend rate which the Dunlop Co. would be allowed to pay would not be the 12 per cent. just distributed for 1939 but the 9 per cent. paid for 1938. Thus the board would be compelled to reduce the rate to 9 per cent. for 1940. On the face of it. this seems harsh application of the new limit, and I should expect some adjustment to be conceded.
ASSOCIATED AUTOMATIC MACHINE
Since the capital reconstruction scheme of 1935 the Asso- ciated Automatic Machine Corporation has paid reasonably steady dividends on its los. shares. For the year ended March 31st, 1940, the net dividends from subsidiary com- panies were slightly higher at £16,780, but after allow ing £9,250 for E.P.T., the net profit suffered a modest cont; ac- tion, and the dividend is down from 51 to 41 per cent. At the meeting, Major Curling explained in detail the balarce- sheet figures, but I feel that the position would be gre itly clarified by a consolidated statement.
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