WISE INVESTMENT

THE Stock Exchange is demonstrating once again its well-known characteristic of never doing anything by halves. Having made up its mind that £1,5oo,000,ocX3 for defence means lower values for gilt-edged and .higher prices for seannament shares, it has proceeded to make the appropriate adjustments with a complete lack of ceremony. In fact, the marking down of gilt-edged quotations has been so severe as to seem almost rude. In the train of gilt-edged, all fixed-interest stocks, including industrial debentures and preferenCe shares of good investment status, have fallen in varying degre e, an inevitable adjustment to the .new basis of investment yields.

I do not pretend to know the precise level at which the market will ground, although I have little doubt that the authorities at Whitehall will arrest the fall soon before it becomes a debdcle. Keeping in mind the pace of industrial recovery and the virtual certainty of a moderate increase in taxation, I see no reason why gil:Ledged should not attract buyers as soon as the yield on long-dated stocks is a full 31 per cent. That point is already very near and may well be reached by the time these lines appear in print. Investors who are seeking income in the fixed-interest market should therefore be prepared to make their purchases in the fairly near future.

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ATTRACTIVE PREFERENCE SHARES

Even at current prices many of the high-grade industrial preferences, such as those of Imperial Tobacco and British- American Tobacco, seem temptingly cheap after the buffeting of the past three weeks, and so do several of the miscellaneous group of preference shares whose merits I have emphasised in recent notes. Here is a group of half a dozen preferences which should meet the needs of safety-first investors in search of reasonable yields : No. of times dividend

Current Yield

covered. price.

£ s. d.

Imperial Tobacco 5i% "A" £i

40 27s. 3d.

4 1 3

British-American Tobacco 5<' ,

LI Pref. .. 24

24s. 6d.

4 2 0 Baldwin 41% Li Pref. ..

3

20S. 70. 4 2 6 Colvilles 51% Li Pref. ..

3f 24s.

4 12 0

Crabtree Electric 5% Li Pref. .. 8 24S.

4 3 0

Richard Thomas 61% tax-free!:

Pref. .. 3 3os. 5 13 9

Both the tobacco preferences show such impregnable cover that they rank very little behind British Government stocks in point of security. Baldwin's preference shares, after the repayment of the company's debentures, become a first charge on profits, and the 51 per cent. issue of Colvilles Limited, the Scottish steel combine, are also strongly placed in view of the increasing earnings. The Richard Thomas 61 per cent. still offer a generous yield in relation to their cover and have the attraction, in a period of rising taxation, that the dividend is paid tax-free.

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HIGH-CLASS INDUSTRIAL ORDINARIES

What shall I say of the sorry case of high-class industrial ordinary shares which, like Lucifer, seem to have dropped from their zenith like a fallen star ? This is the story of the recent fall :

Yield Current Price on last price. Feb. loth. dividend %.

L s. d.

Courtaulds

52S.

55s.

3 19 o

British .American Tobacco

£61 £61

4 4 0

British Oxygen .. £6 £61

2 10 0

Distillers ..

L51

3 18 o

Except in the. case of Courtaulds, the declines are very steep, so steep, indeed; that I think the market .has been altOgether too severe. Some readjustment of low-yielding industrial ordinary shares was admittedly • necessary when gilt-edgeil prices fell, but the basis for the low yieldi was the faVourable earnings prospect. The severe falls of the past-two weeks can only be justified if the prospects of the companies concerned have suddenly deteriorated. .I cannot think of any good grounds for supposing that they have. On the contrary, I should have thought that British Oxygen, British-American Tobacco and Courtaulds, at least, carried enough guns to resist the influence of rising interest rates.

CANADIAN PACIFIC PROSPECTS

Until the directors announced their Preference dividend decision I purposely avoided a discussion of the prospects of the Canadian Pacific Railway. Even now the outlook is far from clear, but I should read the meagre i per cent. preference dividend as a plain warning against over-optimism. Once again the C.P.R.'s American subsidiary, the Soo Line, has made heavy demands on the parent company, and earnings were affected in the last quarter of 1936 by drought conditions. I am doubtful, therefore, whether the full report, due in March, will show that net earnings, on a strict accounting basis, were more than sufficient to cover the x per cent. dividend on the preference stock. Quoted at 52 dollars, C.P.R. preference, which is a 4 per cent. non-cumulative issue, seems to me to be quite high enough for the present.

The 25 dollar common shares, at 161 dollars, look even more optimistically valued, although I have little doubt that from time to time Paris buying of this popular international share will send the price far higher than is justified by either the slide-rule or a reasonably hopeful view of prospects. In favourable harvest conditions and a general environment of industrial recovery the C.P.R. will again earn satisfactory profits, but there is nothing in the immediate outlook to suggest a striking come-back. Problems of maintenance, depreciation of steamships, subventions to the Soo Line, wage-cut restora- tions, all stand in the way of a sharp increase in net earnings. In the circumstances, it looks no more than prudent to await the full report and the President's review before considering a purchase of the common shares.

Venturers' Corner I can sympathise with holders of rubber shares who feel rather left out in the cold while the so-called commodity boom goes on. In a fortnight during which copper, lead and other " essential raw materials " have leapt to new high record levels in the current recovery movement, it is dis- appointing that rubber should remain listlessly around 1o1d. pek lb. In consequence, rubber shares have hung fire, and are still quoted at prices well below those established in the upward movement of the autumn of last year. Without budgeting on any further substantial rise in the price of the commodity, I feel that there is scope for the bold buyer of rubber shares at today's levels. Rubber at 'old. means quite good profits for most producers on the present quota arrangements, and the consumption prospect seems to me to be good enough to keep the wicket firm.

Among the low-priced issues Pelepah Rubber 2s. share3 around 3s. are as attractive as most as a lock-up speculation. During the year to September 3oth, 1936, this company made a Profit of £4,296 and paid a dividend of 4 per cent. That was in respect of a period in which the quota was small and rubber sold at low prices. For the current financial year there will be a great improvement. Production will be much larger and, assuming that all-in costs have been more or less main- tained at 41d. per lb., there should be a profit of something over 4d. per lb., which indicates total earnings of roughly 15 per cent. on the capital. An interim dividend of 4 per cent. has already been paid, and the final should be large enough to give, present buyers quite a reasonable return on their outlay.

CUSTOS.

[Readers' enquiries, or requests for advice, regarding particular shares will be answered periodically as space permits. Cor- respondents who do not desire their names to appear shoUld append initials or a pseudonym to their questions. Replies to correspondents will appear next week.] .