FINANCE AND INVESTMENT
By CUSTOS IT is now becoming clear that in the next few months the words " reasonable net maintainable revenue " are going to assume a real significance for investors. For some time past this conception of a basis for fair compensation to the existing owners of industries to be acquired by the State has been bandied about in Socialist financial quarteri. In a Memorandum on compensation drawn up by the General Council of the Trades Union Congress " reasonable net maintainable revenue " is given such prominence as to suggest that it deserves a little critical examination.
ESTIMATING THE OUTLOOK
Behind the conception is, of course, the natural anxiety of the buyer, in this case the State, to avoid paying such a high price, based on past performance or a mere desire not to be niggardly, as will result in over-capitalisation. The Socialist Government is understandingly anxious to demonstrate that State-run industries can be financially self-supporting, and obviously a top-heavy capital structure at the outset is to be avoided at all costs. While I can appreciate that viewpoint, however, I am far from feeling sure that it is one that can be applied easily in practice. To take the coal industry as an example, what is the " reasonable net maintainable income " of Powell Duffryn? Is it to be measured by an average of the earnings of recent years, by the profits which might have been earned under a Conservative Government or by what the new Government estimates can be earned by the organisation as part of a nationalised coal industry? I do not know the answer, but I do feel sure that there is room for very wide differences of opinion on the subject as between seller and buyer, especially when the seller is not a willing seller, but is being bought out compulsorily by the State.
INCOME AND CAPITAL
Investors will be reassured by the willingness indicated in the T.U.C. Memorandum to set up tribunals to consider cases in which voluntary agreement is not reached. It is worth noting, too, that in the case of coal and the railways current Stock Exchange prices for many of the securities involved are so low that the scope for reason- able compromise is very wide. Nobody would expect that holders of, say, Powell Duffryn £t ordinary shares, now in receipt of an 8 per cent. dividend, would be given the amount of Government 3 per cent. stock, viz., 53s. 4d. nominal, required to produce the same income. Quoted today around 225. to yield over 7 per cent. Powell Duffryn ordinaries are recognised as a speculative industrial equity, although admittedly they would be a few shillings higher but for the nationalisation risk. My point is that by offering, say, 3os. nominal of its own 3 per cent. stock, the Government could give Powell Duffryn ordinary shareholders 41- per cent. income, a capital profit measured—from today's low price—by the difference between 3os. and 22S., and at the same time could achieve a new nominal capitali- sation of very reasonable dimensions.
In the case of many home rail securities, e.g., the Preferences and Ordinary stocks now quoted well below par, the same sort of con- siderations apply even more forcibly. Nominal capitalisation could be severely cut down, and while income would be reduced (but greatly improved in quality by the Government backing) there would he scope for a rise in capital value from current prices. To the many old holders of colliery and railway securities who bought in the dim past at high prices this kind of argument may seem cold comfort, but I fear they will have to face the new facts. It should also he clear that I regard these securities as worth holding for something better than today's levels.
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