FINANCE AND INVESTMENT
By CUSTOS
ON the last lap of a pre-Budget Stock Exchange Account markets are showing unexpectedly strong powers of resistance. So far from Budget nerves, inducing investors to go liquid, there is practically no selling, and buying continues on sedate lines. Even gilt-edged stocks, as I predicted last week, have staged a rearguard action and recovered some of the recently-lost ground. Super- ficially, therefore, the indications appear to be that the average investor is facing Mr. Gaitskell's first Budget in a spirit of calm. That, I think, is reading rather too much into the surprising steadiness of prices. The prevailing mood in the City is an odd mix- ture of hope, resignation and a conviction that whatever new imposts are introduced on April 10th they will not put a really effective damper on inflationary markets. Implicit in all this is an assumption that the new Chancellor of the Exchequer will have the courage to resist the pressure from the Socialist Left-Wing to aim a back-hander at the Ordinary share investor as such. That could take the form of a really heavy increase in Distributed Profits Tax on such a scale as would practically rule out the possibility of further increases in dividends. What Mr. Gaitskell will do is anybody's guess, but I doubt whether he is anxious to hit the Ordinary share investor so hard as to jeopardise the raising of further equity capital for industry. My advice still remains, caution before the Budget but no jettisoning of sound investments.
South Africa's Budget
How Budget forecasts can easily go astray has been well demonstrated by the dis- appointment caused by Mr. Havcnga's pro- posals in South Africa announced last week. In Johannesburg and London it had been confidently predicted that the South African Budget would bring no additional taxation for the gold mining industry. In his search for revenue, however, Mr. Havenga, who cannot by any stretch of the imagination be described as antagonistic to the gold pro- ducers, has returned to the pre-1948 formula for taxing the industry, by which he hopes to extract an additional £925,000 during the financial year 1951-52. Normal tax on diamond shares has also been increased from 4s. 6d. to 8s. This change, allowing for the abolition of the special contribution of 2s. 8d. in the pound, is expected to yield an extra £250,000. Normal income tax on companies, excluding the mining industry, is being raised by 6d. to 4s. 6d. in the pound but is flanked by the abolition of the Undis- tributed Profits Tax. The first reaction in the market to these imposts was one of mild disappointment and a modest fall in share quotations. Second thoughts, however, have reconciled Kaffir shareholders to what is, after all, a small increase in taxation, and prices are now recovering. Between now and the June dividend season there may well well be a revival of speculative interest in South African gold shares in the London and Johannesburg markets. Among the shares of the established producers Springs 5s. shares, now standing at 12s. 6d., look worth putting away. The current yield of 9 per cent. is quite attractive.
A Well-Secured Preference Investors on the look-out for a yield of something over 4 per cent. with cast-iron security might do worse than consider the 4} per cent. £1 Preference units of Baldwins (Holdings). The units can be bought around 19s. 3d. and arc so strongly secured that for all practical purposes they can be regarded as being as good as gilt-edged. This com- pany has just received approximately £7 million of British Iron and Steel stock as compensation for its large holdings in RicHard Thomas and Baldwins Ordinary shares and some other smaller steel interests now nationalised. As the 41- per cent. Preference shares are the company's first charge and there is £1,500,000 in issue it is clear that as to capital they are now covered nearly five times over by British Iron and Steel stock. Apart from that the company at September 30th, J950, had another £2 million of investments, of which £880,000 was in gilt-edged securities. What the directors intend to do now that the major holdings have been exchanged for Steel stock has not yet been disclosed but if in any reorganisation plan the 44 per cent. Preference shares are paid off the repayment price is 21s. In other words, investors who buy around 19s. 3d. would make a small capital profit, even allowing for broker's commission and stamp duty.
Rubber Profits Soar
It is a striking commentary on curren6 conditions in the rubber share market that the results announced for 1950 by United Sua Betong, a leading producer in the Guthrie group, have failed to arouse any enthusiasm. This company's estate profits rose last year from £259,912 to £1,435,013 and, after allowing for the inevitably steep rise in the taxation charge, net profit was up from £149,216 to £679,717. Earnings on the £900,000 of capital thus increased from 30 per cent, to 150 per cent. and Sir John Hay, tempering generosity with caution, has raised the reserve allocation from £50,000 to £425,000 and the dividend from 174 per cent. to 50 per cent. Stock Exchange specu- lators, some of whom had been hoping for as much as 75 per cent., rushed to snatch profits and the £1 shares fell from 74s. 3d. to 70s. 9d. before rallying to 73s. At this price, which includes 5s. 6d. net of dividend, the shares look to me to be a good specula- tive holding to yield about 14 per cent. on a dividend covered 3 times by earnings on an average price of rubber about one-half of the current level.
Ship Owners and Freight Rates
Following a course roughly parallel with that of rubber shares, shipping shares have been hanging fire during the past few weeks after their sharp rise at the beginning of the year. Just as rubber has moved up to an unexpectedly high price so shipping freights have been establishing new peaks. The monthly index of tramp freights issued by the Chamber of Shipping of the United Kingdom rose in February to 164.7 (basis 1948=100). For January the index number was 151.9 and in February of last year it was only 75.5. It seems a little odd that in the share market there has been no response to the February figure, even if one makes full allowance for the fact that to some extent the current prosperity of the tramp shipping industry had been anticipated on the Stock Exchange and for the other equally valid fact that nobody can be really sure how long freights-like the price of rubber -can be held at the present level. The situation is complicated, by the exces- sive costs of new building and by the problems raised by the prices of both new and old tonnage. In many cases, as may readily be imagined, the possibility of dis- nosing of tonnage at high prices is proving tempting to tramp owners who are willing to take the long view. I notice that this week the Silver Line has announced the sale of two of its ships to the Cunard Steam Ship Company. Prices are not disclosed but it is surely significant that the two ships in question are of the modern type, both having been built as recently as 1948. It must be a safe inference that the prices realised have been distinctly satisfactory, City estimates ranging up to £1,500,000. As I have pre- viously pointed out, Silver Line has two motor tanker ships on order, one for delivery in December, 1951, and the other in Novem- ber, 1952. The proceeds of the ships now sold will doubtless be applied partly in financing these new purchases. Meantime, Silver Line 10s. Ordinaries, whose merits I have consistently stressed in these notes, are now standing at I8s. In relation to the profits likely to be disclosed for 1950 the shares are obviously much too high. On the other hand, the company must now be earning at a very high rate and under alert management has fully re-established its finances. I still think the shares should not be sold.
United British Steamship
Among the tramp shipping shares which seem to me to be under-valued at today's price are the Is. units of United British Steamship. This company, which has two motor vessels and six steamers aggregating just over 80,000 tons, made a new issue of shares at 10s. each to its own shareholders in January, in the proportion of one new share for every two held. The proceeds of this issue were to be applied in reinforcing an already substantial cash holding to meet the cost of three new motor vessels of 10,000 tons each, which are on order and will be delivered in 1952 or 1953. When making the issue the directors intimated that all the company's ships were profitably employed and that there should be no difficulty in maintaining the 100 per cent. dividend rate for the current year on the increased capital. The Is. units, which have recently been up to 18s., are now standing at 16s. 6d., on which they give the useful yield of 6 per cent. on a dividend which, in recent years, has been covered several times over by avail- able net earnings. For the year ended June 30th, 1950, when tramp freight rates were very substantially below the current level the company paid the 100 per cent. dividend out of earnings of 430 per cent. In the past six years an aggregate of £500,000 has been set aside out of earnings to reserves. The shares appear to me to be a good medium through which to acquire a stake in the prosperity of the tramp shipping industry.
Previous page
