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SPOTLIGHT ON INVESTMENTS
Gordon Gotch Limited Reserves Expand
S MERITS OF COMMERCIAL BANK SHARES
' (By Alex Jobson) ;
Gordon.& Gotch
1The payment of a bonus of 2 per cent.
a year on the ordinary shares in Gordon
& Gotch (Australasia), Limite~d, for the
March, 1927, half-year, making the rate
10 per cent. a year, has not caused any
improvement in the market price of the
shares. Six months ago they were selling
at much the same price (27/) that they are
today. The reason for this probably lies
in tile fear that the bonus of 2 per cent.
a year may not be repeated.
Some color is lent to this view by the
fact that the net profits for the MIarch,
1927, half-year, £38,383, were not quite
as good as those of £39,226 for the Sep
tember, 1926, period. There was accord
ingly, no justification on the score of
improved earnings for the payment of the
bonus. 3loreovcr the financial position
was not much better than it was in the
preceding September, as the increase in
the surplus df liquid assets over current
liabilities was only £2,700 to £127,587,
which is, however, a satisfactory figure,
though consisting mainly of book debts.
Still, there was some improvement, as
this was after a reduction of £53,200 in
the liabilities, which was accompanied by
a rather smaller decrease in liquid assets.
The directors in recommending the
bonus may, of course, have been influenced
by the steady expansion in the reserves
in recent years from £35,766 to £155,223
(subject to goodwill of £118,074), and the
belief that the condition of the earning
power is now such that the bonus was
justified. The record of the earnings for
the past 51 years is as follows:
Dividends
Sept. -et Profits, Pref. & Ord. Reserves
1922 . ,~ £21,879 8 p.c. £5,548 £35,766
1923 . i.: 46,537 8 p.e. 33,496 49,463
1924 . ,. 57,270 8 p.c. 36,915 60,497
1925 .., . 84,42l4 8 p.c. 40,000 110,959
1926 :., a 78,418 8 p.c. 44,000 145,643
March
1927 . .. 33,383 - 29,000 155,223
No ordinary dividend was paid for the
1922 year. The rate for the 1927 half-year
was 10 per cent a year, the preference divi
dend being at the fixed rate of 8 per
cent. a year.
The profits showed a satisfactory in
crease from year to year up to 1925, but
fell away in 1926, and, as has been stated,
dccreased somewhat in the March, 1927,
half-year, which doubtless influences in
vestors to act cautiously in accepting the
10 per cent. ordinary rate as likely to be
repeated.
The shares appear to be reasonably
valued at 27/, and should be a satisfactory
investment over a period of years. The
company has a firmly established business,
and its management has done particularly
well in recent years in raising the net
profits to a pitch in which one half
year's earnings are £16,000 more than was
made in 12 months five years ago. While
progress at this rate cannot be expected
mn the future, the directors should be able
to show improved earnings and eventually'
to place them on a basis capable of main
taining dividends of 10 per cent.
Amount to be investcd, £135.
Buying 100 £1 ordinary shares fully
paid.
Price, 27/.
Yearly income, £10.
Return £7 8/1 per cent.
Commercial Bank -
The investor who fsavors bank shares,
and is prepared to accept a comparatively
moderate income yield on his outlay
Ishould give some attention to the ordi
nary shares in the Commercial Bank of
Australia, Limited. These shares are
cheaper than they have been, for which
the prevailing stringency of money and
the reduced supply of capital available for
Stock Exchange investments due .to tli,
heavy demand for new capital by estab-
lished concerns, are mainly responsible.
The merits of the shares as an accumul
]ative interest chiefly rest on two things.
One is the ability of the bank to cou
tinue to pay dividends of 15 per cent..
on its ordinary capital. That ability
will be evident from a study 'of the"
attached table showing the growth of the
earnings in recent years and the substan
tial margin of such earnings after pay
ment of dividends:
Dividends.
Pret.
June. Net profit. and Ord, Amt.
. p.c. p.c, S
19 23 . . .. .Y 224,419 4 533 136,776
1924 .......... 254,5142 4 15 142,426 -
192.5 .... . .... 290,53G 4 35 171,79?
1926 ......... 297,707 4 15 204,053
1927 .......... 316,711 4 15 234,420
The margin available for reserves, it
will be noted, has been large in each
year. The actual additions to the re
serves have, however, been materially
augmented by premiums received on 'rc
cent issues. In the past five years the
visible reserves have risen by nearly
:£1,340,000 to £1,381,760. The bank has
in addition reserves for contingencies, the
amount of ,which is not disclosed,
There is no good reason to assume ~thast
the earning power will show any marked:
wealkening. On the contrary, should the
depressed feeling in business circles prove
to be only a passing phase, the business
of the bank should continue to increase
and its profits to improve. Granted rea
sonably good business conditions the
bank should be able to maintain the ordi-.
nary dividend at the current rate of 35
per cent. a year.
The shares also have merits by reason.
of the prospect of further new .shard
issues from time to time. These have
been frequent in recent years.. Since:
November, 1920, inclusive, there have bee!
no fewer than six issues of shares. -While
it is too much to expect that they nwil
continue to be made as often in the
future, it is not at all improbable that
the shaireholders will still be given oppor
tunities of increasing their shareholding
from time to time, as the business' o
the bank requires more capital.
So far the issues have been made at
a premium of 10/ for each 10/ ordinary
share. This is a high premium, doubt
less justified in the eyes of the directors
by the 15 per cent. dividend and by the
market value of the shares, which have
been ranging about 30/. Moreover, until
recently the visible reserves of the bank
were small, and it was essential that the
directors should take 'steps to raise them
to a reasonable amount. To this end
they have wisely availed themselves, f
the opportunity of obtaining a premium
on new sharbs offered 'bry the existing
shares being in demand at a substantial
premium.
The visible reserves now ecceed the
issued ordinary capital by about £130,000.
and the bank is approaching a condition
when the necessity for resorting to share
premiums for reserve purposes will not
be so great. Whether the directors will
evecntually decide to reduce the premium
on new shares or to abolish it altogether
remains to be seen. While it is pos
sible that they may. see their way to
issue shares on better terms, the shares,
even admittihg the prospect of. a pre
mium, are still worth consideration on
their own nierits.
Amount to be invested. '£'3S 5/.
Buying 100 10/ ordinary shares iuy
paid.
Price 27/9.
Yearly income, £7 10/.
Returu, £5 8/1 per cent.
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