FINANCE AND INVESTMENT .
By C USTOS
WITH the help of a little optimism from Whitehall the market recovery has now gathered considerable momentum. Gilt- edged stocks are naturally in the lead, and although the rise has been accentuated by sheer shortage of stock and some buying by short-term speculators I think it is justified by the financial facts. Unless official optimism is badly misplaced the balance of payments position is likely to get better in the next few months, and that, as I have recently emphasised in these notes, minimises the risk of a further rise in interest rates. Gilt-edged may therefore recover more of their lost ground before the end of the year, although one should not expect the present pace to be maintained. Subject to the same qualification—that the advance is bound to be punctuated by setbacks—the prospects of markets as a whole now look brighter, provided the buyer shows discrimination. The improvement in gold shares is a belated recognition of the fact that conditions for gold producers are now over the worst, but I doubt whether this movement can get very far unless and until the American Treasury sees fit to raise the price of gold. South Africa will raise this question once again at next month's meeting of the International Monetary Fund and she should get some support from the United Kingdom. The chances of persuading America to change its view do not look to me particularly good just yet, but when American business turns down it may be quite another story.
Cossor Recovery When is the time to buy shares for recovery ? In almost every case before the company's fortunes have been restored. This rule applies, I think, to the 5s. ordinaries of A. C. Cossor, the electrical and scientific instrument makers, which are now quoted around 1 1 s. 9d. This company has just announced a substantial improvement. Group income, taking trading profits and in- vestment income, for the year to March 31st, rose from £481,169 to £487,977. A sharp fall in sales of radio receivers was offset by larger sales of television sets, but the net figure, after tax, was down from £154,100 to £115,000. The board's decision to resume ordinary dividends, now that preference arrears have been cleared off, with a 10 per cent. payment must therefore be considered generous. It is especially so when one sees that record turnover is reflected in ihe consolidated balance sheet in a jump of about £1,500,000 in stocks and work-in-progress to £3,406,448 and a rise in bank loans from £259,317 to £813,891. For the time being the directors are relying on bank facilities to finance the rise in stocks, but the question of providing more permanent capital is being carefully considered. It is against this background that one needs to consider whether at 1 ls., yielding only a little over 41 per cent., Cossor 5s. ordinaries are cheap. In my view they must be regarded as fully valued in spite of their long-term potentialities. While the group's activities in the radar and electronic engineering field are still expanding, the immediate earnings possibilities are limited by the difficulties in the radio and television sections. Then again, quite apart from the problem of new financing, there is a limitation on distributable net profits set by Excess Profits Levy. Although the chairman cannot indicate what the company's E.P.L. standard will be, he warns shareholders that it will be well below the current level or earnings.
Burmah Oil Ex Bonus Having preached the virtues of Burmah Oil ordinary shares over the past two years I feel constrained to review the position as it now presents itself after the one-for-two scrip bonus. Many holders, one fears, may be tempted to sell some of their bonus shares without realising that if they do so they are reducing their investment in the equity of a magnificent company. On the facts as I see them—and despite the cautious forecasts of the chairman at last month's annual meeting —Burmah Oil new ordinaries, which will be free of transfer stamp duty until September 23rd, are a promising holding. Admittedly, the group's capital programme over the next five or six years is estimated to involve some- thing between £20 million and £25 million and the incidence of Excess Profits Levy has also to be considered. Against these two factors which indicate the need for caution in assessing the dividend outlook can be set the good cover behind last year's 21 per cent, distribution and the improving outlook for income from the company's large holdings in Anglo-Iranian and Shell Transport and Trading. One feels, therefore, that the 14 per cent., which on the larger capital would be equivalent to 21 per cent., can be regarded as a minimum and that a modest increase to 15 per cent. is a reason- able possibility. If the rate on the larger capital is held down to 14 per cent. the yield at 47s. is just over 6 per cent. On a 15 per cent. rate the return would be 61 pet- cent. In my view Burmah Oil ordinaries should not be sold.
Distillers Decision Those who hoped, on the strength of the board's review when the new convertible stock was issued earlier this year, that there would be a modest increase in Distillers' ordinary dividend have been disappointed in the event. Although net profits are about £400,000 up at £7,500,000 the dividend is again 221 per cent. and, significantly enough, a large sum is transferred to stock contingencies reserve. This decision seems to me to be part of a threefold explanation of the board's cautious distribution policy, the other two influences being the probability that conversions of loan stock will gradually add substantially to the issued ordinary capital and the steady pressure of increasing business on the group's working capital resources. With its activities now extending far beyond the potable spirits business the Distillers Company offers a promising medium of long-term investment. At 18s., yielding over 41 per cent. on a well-covered dividend, the 4s. ordinary units are a sound industrial holding.
G.U.S. Surprise For the fifth successive year—and in face of the known difficulties in the retail trade Mr. Isaac Wolfson's Great Universal Stores has achieved an increase in profit. Earlier this month the reports of the companies which form the retail furniture section of the G.U.S. group showed surprisingly good results, with profits before tax for the year to March 31st of just over £3,000,000, against £2,331,000. Now the figures for the group as a whole show profits of over £10,000,000, a rise of £1,800,000 on 1950-51. Of this increase £916,000 was attributable to increased trading profits of subsidiaries, in which the parent company's shareholding was not materially altered during the year, the balance representing the benefits of expan- sion. These results must be judged satisfac- tory and will appear even more so if, as I expect, the full accounts disclose a reduction in bank loans. Bank interest charges have increased, but this probably reflects the rise in loan rates and not a further rise in indebtedness. In the light of the record profit figures nobody will quarrel with Mr.
Wolfson's decision to raise the ordinary dividend from 40 per cent. to the equivalent of 50 per cent. on the capital as it stood before the recent one-for-one share bonus. The 5s. ordinaries at 15s. 3d. are priced to give 8 per cent. on the new indicated dividend rate of 25 per cent. which is covered by a very wide margin. They area speculative holding but not without attraction.
A Cheap Preference Share Investors interested in shares, combining income yield with a chance of a rise in capital value might consider the 6 per cent. cumula- tive £1 preference shares of Brick Investments, now quoted around 13s. This is a holding company with a controlling interest in Yorkshire Amalgamated Products and sub- stantial investments in Yorkshire Brick and in Flettons, Ltd. Dividends on the prefer- ence shares are in arrears from September, 1948, or the equivalent of about 2s. 6d. a share net, and already a good start has been made in wiping the slate clean. During the year to June 30th, 1951, a full year's prefer- ence dividend was paid, followed by another year's dividend—which brought matters up to September 30th, 1948—in March last. The point which gives attraction to the shares is that Brick Investments' income is only now getting the benefit of the improved position of Yorkshire Brick and Flettons. Both these companies have been doing better and should, of course, continue to benefit from the higher level of housebuilding activity. In the last accounts of Brick Investments no diyidend was received from Flettons, who have since paid dividends of 5 per cent. for 1950 and 10 per cent. for 1951. Yorkshire Brick, having now cleared off its own preference arrears, is in a position to pay a dividend on its ordinary shares, of which a 4,1arge proportion are held by Brick Invest- ments.
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