FINANCE AND INVESTMENT
By CUSTOS As I suspected, markets are not finding it easy to hold up in face of continuing uncer- tainties. Gilt-edged prices, from which in present conditions other markets and, especially, well-secured prior charges and the best industrial equities must take their cue, are still slithering. Now and again institutional buyers pick up cheap lines of stock but most investors are on the side- lines and there is nb sign of official support. Unless we are to have deflation, as distinct from disinflation, the present level may well prove a reasonable basis for long-term investment but I do not forget that stock -market recessions, like market rises, usually go too far before the reverse movement sets in. One should be prepared for a longish period of dull markets.
c• English Electric Financing
Among the most powerful influences now holding down market values is the pressure of new industrial financing on investment resources. Even the dismal failure of the £14,000,000 Lever Debenture issue has not deterred other industrial borrowers from coming forward with their new financing plans. This week the Manchester Ship Canal has asked for £5,000,000 on a Debenture issue, and there have been other issues run- ning into substantial figures on behalf of several water companies. The sort of com- promise to which many industrial under- takings may well be forced by unfavourable market conditions is exemplified by the new financing carried through by English Electric. This progressive group has revised its original plans by combining a rights issue to the Ordinary stockholders with a private placing of Debenture stock. The rights issue, which is at 55s. and in the proportion of two new shares for every seven held, seems to me to provide an opportunity of acquiring a stake in this company on attrac- tive 4erms. The new shares (nil paid) can be bought in the market around 3s. 3d., which means that one is buying into the shares at 58s. 3d. free of stamp duty and, of course, on a smaller broker's cdmmission than if one were buying the shares fully paid. The current Ordinary dividend rate, which is covered by a large margin of earnings, is 15 per cent., and there would appear to be little risk that at least this rate will not be forthcoming on the larger capital. Now priced to yield rather over 5 per cent. on a well-covered dividend the Ordinary shares should turn out a good industrial investment.
Combined Egyptian Mills These are gloomy days in the textile share market, where prices are being adjusted not to the profit figures now being announced, which relate to the past periods, but to wide- spread expectations of a coming fall in earn- ings. While one must not quarrel with the market in performing its legitimate function of looking well ahead, one is entitled to wonder whether in some instances the down- ward adjustment of share quotations is not being overdone. The fall in the ii Ordinary shares of Combined Egyptian Mills from a recent level of 17s. 6d. to 14s. -6d. seems to provide a case in point. This company has just reported a sharp increase in profits for the year which ended on September 30th. Trading profits have risen by no less than £1,255,000 to a peak of £2,507,000, and net profit, after tax, is virtually doubled at £872,525, against £442,791. After providing for the service of the Income Debentures there is an available balance equivalent to earnings of 63 per cent. on the Ordinary capital. Very wisely the board are follow- ing a conservative distribution policy and are content merely to increase the Ordinary dividend from 6 per cent. to 8 per cent. It might have been expected, however, that the shares would hold steady on the strength of such excellent figures. Instead, they are down to 14s. 6d., at which the yield on the 8 per cent. dividend is over 11 per cent. On earnings the shares are priced to yield nearly 90 per cent. In part these high re- turns must be attributed to misconceptions about the nature of the company's business, which spring from the title of Combined Egyptian Mills. This company has no mills in Egypt ,and draws its cotton supplies not only front Egypt but from many other sources. Shareholders will doubtless wel- come their chairman's undertaking that if the need should arise steps will be taken to rename the company and put an end to false fears concerning the assets and the supply position. In his statement Sir John Rey- nolds naturally draws attention to the recent contraction in overseas demand for cotton yarn and to the dangers of Japanese com- petition. He also reminds shareholders of the steep rise which has taken place in assets replacement costs. Against these may be set the strong reserve and cash position which haf been built up as a result of con- servative dividend policy in recent years. At their present level the Ordinary shares quoted so far below par look to me a reason- able textile speculation.
No Guinness Bonus Brewery companies continue to show uneven trading results and a correspondingly varying pattern of dividend decisions. Among the companies which have succeeded in maintaining their trading profits is Arthur Guinness, Son and Company, the Dublin and Park Royal brewers. On the other hand, stockholders get an unpleasant surprise in the board's decision to drop the 4 per cent. cash bonus, which results in the total dis- tribution being cut down from 32 per cent. to 28 per cent. While it is true that the chairman emphasised last year that this 4 per cent, had been paid in special circum- stances and would not necessarily be mainc,. tamed, few stockholders have been prepared for a reduction in the total distribution for a year which was confidently expected to show an increase in profits. The actual figures are well up to forecasts, in that profit- for the year ended September 30th rose from £4,521,583 to £4,615,494, after charging £347,017, against £257,587, for depreciation., Lord Iveagh, the Guinness chairman, ex- plains the omission of the 4 per cent. cash bonus in terms of the persistently rising costs of materials and operation, as well as replacement of assets, and the punitive rate of the Profits Tax. Following these results Guinness £1 Ordinary units have tumbled several shillings to 128s. 6d. They now yield 4+ per cent, and in my view are fully valued for the time being.
B.S.A. Capital Needs The effects of rising prices and onerous taxation are well illustrated in the latest figures of the Birmingham Small Arms Com- pany. By July 31st, the latest balance sheet date,-this company had used up most of its cash and Tax Reserve Certificates and incurred bank borrowings to the extent of nearly £550,000. These changes reflect a substantial outlay on capital account and a further sharp rise in the group's turnover. A special influence was the purchase towards the end of the year of the share capital of the Triumph Engineering Company, manu- facturers of Triumph motor cycles, a trans- action which seems to have involved not far short of £2,500,000. Against the back- ground of these figures it seems not improbable that B.S.A. will have to join the industrial borrowing queue and raise new permanent capital at some not very distant date. A sharp increase in profits attests to the further growth in the group's business, which covers a far wider range of activities than the manufacture of guns and rifles. B.S.A. has substantial interests in the mak- ing of cycles, motor cycles, machine tools, iron castings, and, through its Daimler sub- sidiary, motor cars. Net trading profit subject to tax has risen from £1,126,000 to £2,110,000, which has enabled the board comfortably to maintain the dividend rate of 10 per cent. to Nirhicla it was raised from 74- per cent, a year ago. This dividend is covered by earnings of about 50 per cent. In the market slide B.S.A. £1 Ordinaries have come down from 41s. 9d. to 37s. 6d., at which they are yielding 5+ per cent. They should now be worth holding.
A Cheap Brick Share Early in October I outlined the attractions of the 51: Ordinary shares of the Yorkshire Brick Company when the price was around 4s. 3d. Today a buyer would have to give a few pence more than this but the shares can still be bought under par. They seem to me to have merit as a lock-up speculation now that the brick industry is operating in rather more favourable conditions. As an indication of how the company is faring it is worth noticing 'that the board has just announced the clearing off of Preference arrears by payment of two years' dividends, bringing them up to December 31st. In the report for the year to March 31st issued as recently as October the directors held out the hope that these arrears might be paid before the next annual meeting. Since that is not due until October i 1952, one must assume that the company's earning power has already improved and that the outlook is being viewed with some confidence. On the profit figures for the year to March 31st, 1951, earnings on the Ordinary capital, after deducting a normal one year's Preference dividend, amounted to 14 per cent. It is apparent, therefore, that there should be scope for a reasonable Ordinary dividend in the current financial' year, which should make the ,shares worth at least their par value.
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