Financial Reviews FIVE PER CENT. DIVIDENDS

NZ Truth, Issue 1173, 24 May 1928, Page 16

Financial Reviews FIVE PER CENT. DIVIDENDS

Low Earnings

Market Prices

Gisborne Gas Company 's Inadequate Return To Shareholders SHARES UNPOPULAR WITH INVESTORS I . . ..■■"':.■ ■ ■ ' ■•■ (By . •'Fiat Lux.") "Let there be light, " saith the multitude of Gisborne, but the Gisborne Gas Company's accounts for March 31, 1928, indicate that the multitude, is not paying an adequate price for the provision of light and heat since shareholders m the company have to accept a very modest five per cent, dividend. .

THE five per cent, dividend is becoming a very bad habit with this company and is an inadequate return upon shareholders' funds. In point of fact, a fivo per cent, dividend In itself is not invariably a Blgn of depressed net carningrs, since a company may actually be earning, say, 12% per cent, on its capital and paying only a five per cent, dividend, utilizing the balance of the net earnings to build up either disclosed or secret reserves. In : the case under review, however, there is no suggestion" that the company is earning more than sufficient to pay its shareholders the miserable return of five per cent., while the reserves, instead of being built up, are gradually decreasing m strength. In 1921 the disclosed reserves totalled no less than £7482, whilst at March 31, 1928, the total is only £4800. In all the Intervening years five per cent, has been the annual dividend rate

and at least since 1923 the earnings have been barely sufficient to meet this . inadequate dividend.

tors' point of view, this result, is all wrong and the market price of shares, which is about half face-value, is the investors' method of showing disapproval of the poor results which have accrued from the financial management of this concern. Admittedly, Gisborne is unfortunately situated, m that its total port charges are high on account of the necessity for lighterage, but this cannot soundly be advanced as a reason for the Gas Company's low net profits. Presumably the landing charges were, as much per ton m 1921 as today, yet m 1921 the company's profits were nearly double what they are now. Certainly the retail price of gas was higher then than now; it Is clear that the reductions m price were unwarranted and must — m fairness to ghareholders — be reimposed. To this cause consumers cannot reasonably object. These remarks anent the poor net earnings of the company are not to be taken as indicating, that the concern is financially unsound— far from It.

But it is undeniably a fact that its shares are not looked upon favorably by investors because of tho low earnings. A continuance of low earnings may— and probably will — eventually wreck the concern, hence the necessity for : remedying matters whilst there is yet time to do so. . Actually, based upon a market price of 10/- per.share, investors are doubtless agreed that although the com* pany's paid-up capital is £53,402, its low earning power has made this capital worth only half that sum. ' Surely this clear and definite indication of interested opinion should be sufficient to induce directors to put into immediate operation plans to improve results. ■■..• For the past year the company's gross earnings amounted to £30,605', compared with £31,771 m 1927, which was an exceptionally high year. Thus the fall m the gross 1 revenue for the year was £1166. . / This figure, however, does not: tell the full story— actually gas sales were £329 less; tar sales £257 less; and

coke sales £712 less", a gross total of £1298. This, however was fortunately offset by an Increase m profit' "on apr

pllance, Interest -„ on investments ana other sundry revenue, which, at' £616, was an increase of £132 over the previous year, thus reducing the gross loss m turnover to £1166. The reduction m gas sales is difficult to reconcile with the big increase m the sales of gas appliances, but it must be assumed that consumers are using such appliances chiefly for emergencies, instead of for regular and everyday purposes. "Fiat liux" believes that--given good appliances, and gas of a high , calorific value— the increasing use of the combination is largely a matter of education, which should be (and is, m most instances) undertaken by the gas purveyors by means of advertising ahd the provision of show-rooms. Points such as these, however, are entirely matters of policy, which should be decided upon by the directors and put '■ into operation by the executive management. . > The results would soon be sufficiently apparent tp make the company's shares again attractive to investors.

Cpmihg to the expenses side of the profit and loss account, It is pleasing to note that not only have the total expenses decreased, but the ratio of expenses to gas sold has also decreased. Last year the expenses totalled £29,038, being 91.4 per cent, of gas sales, whilst this year the figure Js £27,812 and the percentage It bears to the gas sales is 90.8. The saving m pounds sterling is not great, certainly, but £153 saved is £153 gained— and m this case represents considerably more than the year's accretion to reserves^ ' In the individual items of expense, It is satisfactory to note that practically every item shows a reduction. Regarding the percentage of materials used m proportion to gas sold, it is very puzzling to find that this percentage varies considerably from year to year and it is difficult to offer any explanation. , For instance, m 1925, materials cost £14)107 and gas sold realized £24,716,

hence ratio or cost of materials was 53 per cent. In 1926, the percentage rose to 55 per cent.; m 1927 it again went up to

58.8 per cent., but m 1928 it fell back to a low record of 50.9. Had the 1927 manufacturing been done at the same percentage cost for materials as m 1928, the company would have been over £ 2000 better off m net earnings for that year. In matters of this kind the directors presumably have the complete comparative data presented to them; if, as this writer suspects, the cause of the variations is coal and freight contracts, then the directors should be able to overcome the trouble. The only item of expense which has shown an increase during the period Js that of general expenses, which cover all administration expenses, and also gas-fitting and labor, bad debts, legal, proportion of cost of floating debentures, and at a total of £2470 shows an increase of £309. Why the profit and loss account is not properly used, it Is difficult to say, but actually it is used as, a combination of profit and loss account and profit and loss appropriation account.

The result Is that neither In the published Accounts nor m the report is the year's net profit • disclosed. ■ ■ j •■■ Th© net earnings for th« year were £2793, but without doing a little figuring with pencil and paper it is doubtful whether a trained accountant couid ascertain this fact — let alone a layman shareholder. One wonders whether this out-of-date and Obscure method of presenting the working account is any criterion of methods followed m other branches of the business. The balance-sheet shows the company's liquid , position to be al- ' most the same as a year ago, but the liabilities to creditors and the bank have increased by £1116. The money has gone, principally into book debts, which have increased by £1090 to £8219. This seems very high indeed" for the company's turnover, but is largely ae-' counted for, no doubt, by sales oh the hire-purchase system. / i This is perfectly sound trading and should result m maintaining the demand for the company's principal pro-

duct; thus, ■ultimately, the company should reap a compound benefit by '..'.•way of profit oh ' the sale of appliances and

profit on additional gas sales. Dealing seriatim with those items which would appear to warrant com- ! ment, the first is the general reserve account, which appears to.be really a renewals reserve, since the yearly expenditure on retort renewals is debited thereto.This account, which, a few years ago, stood at a very substantial . amount, has been gradually depleted for retort renewals, whilst the only accretion is an annual credit of £107, being oner tenth of the cost of floating the £30,000 8 per cent, mortgage debenture issue. Frankly, "Fiat Lux" does not understand this procedure. The insistent questions arise: Where are the funds for retort renewals coming from when this reserve is exhausted? Is posterity going to find fresh capital for the work or will a new, series of mortgage debentures .be raised? . On the- present showing, shares m this concern cannot be said to be attractive, even at market prices, and it it safe to predict that they will become even less Valuable unless a considerable improvement m earnings Js shown and "maintained m the future.

GISBpRNE GAS COMPANY, LIMITED. Condensed Comparative Balance-Sheet, Marcfi 31, 1928. , LIABILITIES ASSETS ■.■'■■...' £ £''.', .. £ £ Capital, paid-up .. 63,402 — Freehold property and Reserve . . . . . . 3,677 t279 l buildings . . . . 3,431 — Profit and loss ..= r.. 2,458 *59 Plant .. .. .. 73,685 t243 . . — — — , Furniture = and fittings 607 • 40 . . " 59,537 t220 Stocks 8,736 *131 Debentures .. ...... 30,000 — Debtors .. ... .. 8,219 ♦1090 Consumers' deposits .. 1,155 •62 Motor vehicles ;. .. 325 t6O Creditors «.. .. 2,236 *522 Deposits and investBank . '..; ... .. 4,507 ♦594 ments ... ... .. 2,432 tlO ■ '■;•." £97,435 *95& ".■'. '.',,.. ' £97,435 »958 NOTE. — * Indicates increase and t decrease compared with the 1927 figures.