FINANCE AND INVESTMENT
By CUSTOS IT is one of the defects of so-called planning that when the plan goes wrong everything is left in the air until the planners make up their minds about the next step. Of this unfortunate fact we have a most dismaying illustration in what is now happening to gilt-edged stocks. For obvious reasons the cheap money plan, at least as enunciated and sponsored by Mr. Dalton, has run into trouble. Prices of long-dated stocks have been tumbling and the Government's 3 per cent. medium-long borrowing line has been badly breached. But nobody knows how far the fall will go because the market, once controlled, is now out of hand. Does the Treasury intend to stage a counter-attack or will it continue to give ground in the hope of digging in later in the year around 4 per cent. ? The City does not know the answer. Until it is given an inkling of official intentions, there can clearly be no basis for any serious buying. As matters stand, it is all too evident that the planners at Whitehall are still at their wit's end to cope with the dollar crisis and are well aware that until something effective is done, any attempt at stopping the rot in the gilt-edged market would be both premature and costly. Frankly, I cannot see any really solid basis for investment in present conditions and would still counsel a policy of partial liquidity. I must add that for the specu- latively-minded a sprinkling of gold shares looks to me to be more appropriate than ever, despite American denials of any intention to raise the price of gold.
NEW ISSUE PROBLEMS
One of the most serious consequences of the fall in security prices, apart from the losses inflicted on investors, is the difficulty put in the way of new issue business When prices arc falling it is practically impossible to pitch the terms of new issues of capital successfully and already we have seen what would normally have been regarded as attractive offers meeting with a poor response. The outstanding instances are the issues, made to shareholders, by Guest, Keen and Nettlefolds and Babcock and Wilcox. In both cases adverse market conditions have resulted in underwriters being called on to take up substantial blocks of stock. There may be opportunities here for the long-term investor who is prepared to ignore immediate fluctuations. Guest, Keen new ordinaries, for example, offered at 375. 6d. and with LI paid up, look Cheap at 19s. gd. The balance of 17s. 6d. is payable on September 30th and brings up the total purchase price to 37s. 3d. At this level the yield on the well-covered It per cent. dividend is just under 6 per cent and the shares have the attraction that they can be bought free of stamp duty.
A CHEAP INDUSTRIAL
One hesitates in the present state of markets to recommend a purchase of an industrial Ordinary share, but as I pointed out last week, conditions are such that some shares come on offer at what look like bargain prices. A case in point is the zs. 6d. Ordinary shares of Grayson, Rollo and Clover Docks, which are now quoted around 4s. This company has just made a scrip bonus distribution to the Ordinary shareholders in the shape of a free allotment of 5 per cent. Preference shares. The effect on the capital structure is that £157,650 of these new -5 per cent. Preference ranks in front of £157,650 in 2s. 6d. Ordinaries. In the market the price of the Ordinary shares, which stood at 6s. 6d., has been marked down to 0. ex bonus. In my view this adjustment has been too drastic, since the dividend requirements of the new block of Preference capital are very small in relation to net distributable profits. For the year to March 31st, 1949, the company earned well over zoo per cent. on the Ordinary capital, out of which a dividend of to per cent was paid. If one deducts the new Prefer- ence dividend, earnings on the Ordinary capital, assuming that profits are maintained, will still be over zoo per cent. The company's business is that of ship repairers and engineers and profits have been steadily increasing in recent years. Although there may be some falling off from recent peak figures, the outlook looks promising at a time when the cost of building new ships is abnormally high. At 6s. the Ordinary shares offer the attractive return of 61 per cent. on the present dividend, which, as I have shown, is at present covered by earnings of over zoo per cent. There should be scope for some improvement in better market conditions.
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