Page 2, 14th October 1938

14th October 1938
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By Our City Editor

The Munich Agreement has left markets puzzled, though comparatively optimistic. The weakness of sterling in terms of the American dollar, a marked feature of this week, is enough to show that European entanglements are far from being forgotten. At the same time there has been an enormous sense of relief and a strong wish to believe that we are set fair for some months.

As I have mentioned before, in times like these the investor with strong political convictions and a power of judging the future of the European situation has the opportunity of making cheap and sound investments—if his views turn out to be correct.

Jo other words, whereas in more settled times the outsider is heavily handicapped by lack of " inside information," in times like these the best " inside information" is a power of political judgment.

Fortunes Missed Thus during the crisis a fortune awaited anyone with some capital who was willing to trust his judgment that there would be no war, and a bigger one awaited the man who believed that Germany rather than Czechoslovakia would come out on top without a fight. The course of prices in German and Czech bonds depended entirely on these factors. On " Black " Tuesday German bonds could be picked up for a song, and they have nearly trebled in price since.

But this is past, and the prudent investor, with a political mind, has got to judge of the future course of events.

Chief Choices

The main choice of investment lies between British gilt-edged securities, British industrials, Commodity shares, Gold shares and Americans. It would take me too long to assess the merits of each in terms of possible political changes with the economic changes that will necessarily follow them.

Here, however, are one or two points to

remember. In British gilt-edged securities your capital and your income are nominally secure, out the value of both depend upon the future value of sterling. Even if sterling declines (and prices rise) well-selected British industrials are likely to increase both their capital value and their dividends, thereby offsetting the fall in sterling. This is even more likely to be the case in commodity shares, especially if the trend of world and American trade is upward. Gold shares depend upon the price of gold (146s. per fine ounce this week) which of course rises with the fall of sterling. On the other hand gold shares, like other mining shares, copper, tin, etc., do not last for ever, and one has to calculate in terms of the life of the mine concerned. Americans must depend largely on domestic political considerations in the United States, but every fall in sterling operates to the advantage of British investors in American securities.

Shopping By Post

Although readers who apply Catholic social teaching to their selection of investments may feel that they cannot conscientiously participate as shareholders in the big chain-store companies, it is only fair, 1 think, to qualify this principle in the case of Great Univeisal Stores, Ltd., the inclusion of whose shares in the Stores group may give an erroneous impression. Actually, however, this Company's business is almost wholly mail order, and therefore does not deserve inclusion in the criticism of unfair competition with the small, private retailer, its trade being too widespread to cause individual harm.

From the point of view of a large proportion of its three million customers, Great Universal Stores, which conducts the largest organisation of the kind in Europe, provides a useful public service, enabling persons living in remote country districts, or otherwise lacking good shopping opportunities, to buy through the post from an enormous range of essential articles of excellent value and 98 per cent. British manufacture.

The provision of popular shopping facilities for the masses today represents what

can be almost described as one of the country's " stable " industries, which, contrary to the experience in other channels of business, has been well maintained

during the past twelvemonth. So tar as the mail order development is concerned, I learn from a .first-hand source with Great Universal Stores that record trading has been done for the current financial year to conclude with end-March next. This news confirms the expectation of the chairman at the annual general meeting, in June last, when he stated that sales for the first nine weeks of the year showed a marked increase over the same period of the previous year, and that the outlook gave promise of a further substantial increase in earnings.

" Gussies"

Trading profits of Great Universal Stores, which include dividends from subsidiaries, have risen steadily over the past three years, and the annual Ordinary distribution has been maintained at 50 per cent. for the past four financial periods, with the addition for three consecutive years of free capital bonuses at the rate of 10 per cent.

each. Last year's Ordinary distribution was over-earned to the extent of 14.7 per cent., and results for the current year indicate that available earnings on the Ordinary capital of £496,801 will show a very large increase, although no advance in the dividend is anticipated for the moment.

Apparently the policy at present is to further enlarge the already imposing general reserve, now totalling £780,000, and there is always the possibility that one day a proportion of this might be capitalised and issued to Ordinary shareholders in the form of a free scrip bonus.

Recent inquiry for the Company's 5s. Ordinary shares—commonly known as " Gussies "—has shown the market to be very sparsely supplied with stock at around 29s. Investors who have been quietly acquiring the shares from this year's "low" of about 22s. 6d., are believed to. be firm holders, as it is difficult to better the current yield of approaching 8+ per cent. in any issue of a similar class.

Preference Shares—So-called

The nature and rights of shares in relation to issued capital can often be very misleading, and readers would do well to note carefully the proportion oi capital represented when investing in p.t.,etence issues. Companies not infrequently impart a somewhat erroneous impression of security by the border-line use of the title Preference in connection with a certain variety of issues.

I could name a, number of so-called Participating Preference shares quoted on the Stock Exchange, which would be more accurately described as Preferred, in view of the proportion of the total capital represented, while the Ordinary are really Deferred. Take the example of a company with a so-called issued Preference capital of £115,000, and an issued Ordinary capital of £15,000. In a case like this, it is quite obvious that so long as profits attain the required level for any payment on the latter, dividends will be substantial, since the capital concerned is so small. Therefore the junior shares stand to receive all the plums while times are good, whilst directly earnings recede the so-called Pre

ference shareholders bear the brunt. In a case like this there is little doubt that the shares would be more honestly described as Preferred and Deferred.

I believe that there should be stricter inquiry into capital issues in order to ensure that different classes of shares fulfil their pretensions. As it is, investors who require a safe investment often go in for this type of Preference, which offers possibly less security than a first-class Ordinary share.

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