Maynard Paton looks back to when leading shares traded on P/Es of 3 and the start of the 'cult of the equity'.
Six decades is a long time, and The Queen's reign has certainly seen plenty of political, social and technological changes. Back in 1952, Sir Winston Churchill was spending his first year as re-elected prime minister, tea was still being rationed, one in three households still lacked a bath and the first television detection van had been commissioned...
Of course, plenty has happened in the stock market since then, too!
A sixty-year buying opportunity
With the benefit of hindsight, the early 1950s was truly a golden age to buy shares for the very long term. You see, the 'cult of the equity' would begin later in the decade as investors began to unlock value through takeovers as well as discover the benefits of rising dividends.
However, while a prominent retail magnate and leading fund manager were on the brink of changing market valuations forever, most ordinary investors in 1952 did not seem that optimistic.
Indeed, the FT 30 -- the forerunner to today's FTSE indices -- at times during 1952 traded 25% below its 1947 peak. What's more, the Chancellor of the day, Rab Butler, warned Britain could end up "bankrupt, idle and hungry" as various economic worries prompted government cutbacks, excess profit taxes and surprise lifts to interest rates.
But as the market has demonstrated numerous times since, the gloom eventually lifted -- and the FT 30 actually went on to double in value between 1952 and 1955.
Sectors and shares
When Queen Elizabeth ascended the throne, British industry was dependent heavily on manufacturing. Chemicals, oil, engineering, shipping, foods, plastics, construction and rubber manufacturing were among popular sectors of the day, and venerable names such as ICI, Shell, Courtaulds, Associated Portland Cement, Tate & Lyle, Woolworth and Rowntree were among the prominent blue-chip picks.
To give a flavour of how things have changed, April 1952 witnessed one of the era's few major mergers -- the combination of Austin and Morris to form the world's largest car manufacturer outside of America. At the time, the new venture -- then called British Motor Corporation -- controlled 50% of the domestic car market and sported a market cap of… £35 million.
Looking back, one of the most striking features of the market during 1952 was the valuation of some of Britain's leading companies. Government rules that had restricted dividend payments, next-to-no market information for investors and company directors that preferred to play very safe during post-war austerity all left share prices -- at least by today's standards -- trading at rock-bottom prices.
Classic buying opportunities were highlighted by brokers Read Hurst-Brown and recounted by John Littlewood in his book 50 Years Of Capitalism At Work. Here's one example:
"The shares of Joseph Lucas traded at 33/6d to yield 4.35% [during 1952]. The dividend was covered nine times by historic earnings, and good results for were expected for the current year... Furthermore, the 1951 balance sheet was stated to show 'a position of great strength and net liquid assets alone equivalent to approximately 48/- per share' .
In other words, Joseph Lucas was valued on a price-to-earnings (P/E) ratio of less than 3 -- equivalent to 70% of the group's working capital.
Here's another example:
"Glaxo Laboratories was a growth stock by the standards of the 1950s and its shares yielded 3.85%. The dividend was covered nearly twelve times by earnings to give an earnings yield of 45%, or P/E ratio of just over 2."
"Among higher-yielding stocks was P&O Steam Navigation... the shares yielded 5.25% with the dividend covered 9.5 times by earnings to give a P/E ratio of precisely 2. The shares stood at 58/9d with an estimated asset value of £9" (i.e. a price to book of 0.3)
Shoe chain receives landmark offer
A milestone event drawing attention to such lowly valuations was the surprise offer for J Sears. During 1952, retail and property entrepreneur Charles Clore eyed up the shoe chain when its shares traded at 20/-, and then launched a 40/- per share bid in early 1953.
The bid for J Sears broke new ground in the market -- it introduced the concept of the hostile takeover that offered existing shareholders a premium for their shares. Prior to Clore's bid, company acquisitions were very genteel affairs -- directors arranged cosy deals and investors meekly accepted whatever was offered.
But in the case of J Sears, Clore didn't negotiate with the management and instead took his offer straight to shareholders. The board at Sears attempted to fend off Clore by tripling the group's dividend, but investors saw the move as reckless and quickly sold to Clore for a quick 100% profit.
Although the Sears bid caused questions to be raised in parliament and sent shivers through many boardrooms, Clore was adamant that "neither this country nor any business can afford to have its resources remaining stagnant".
Investors meanwhile suddenly realised the value shares offered and the profits to be made from takeovers, and the market -- then priced at about 6 times earnings -- never looked back.
The birth of income investing
The activities of Charles Clore certainly helped a particular fund manager in Bristol. George Ross Goobey became manager of the Imperial Tobacco (LSE: IMT) pension fund during 1948, and by 1952 was well on the way to causing a revolution in the fund-management industry. He had decided to switch out of bonds and move entirely into shares.
Ross Goobey's investing logic was simple: at the time, shares offered dividend yields well in excess of gilts and history had suggested company payouts could grow in line with the wider economy over the long term (wars excepted).
During the early 1950s, Ross Goobey explained his decision through various papers presentations, and the wider fund-management industry gradually started to follow suit. In fact, the archives suggest high-yield investing as we know it today was established about the time the Queen came to the throne. Here are a couple of quotes from Ross Goobey from the 1950s:
"In mentioning capital appreciation in this connection I am not doing so because I am necessarily interested in capital appreciation as such but merely in so far as capital appreciation might be a measure of the improvement in profits and/or dividends of the company concerned."
"I have been accused of "being interested only in yield", the implication being that the higher the conventionally quoted yield is the more I am attracted to a stock. This is true to a certain extent... but I am of course aware that the conventionally quoted yield is based on last year's dividend only, and that the realised yield (and this alone is the yield which we are concerned) depends on the dividends received in the future. Therefore, with each investment that we make there is a mental appraisal of the chances of last year's dividend being maintained or increased.'
Essentially, Ross Goobey effectively helped trigger the 'cult of the equity' and, by 1959, the market's yield had dipped below the income available from gilts for the very first time. The so-called 'reverse yield gap' would then persist throughout most of the following five decades...
... although today's investors now find themselves in a similar situation as Ross Goobey did 60 years ago, with the FTSE 100 (UKX) currently yielding nearly 4% and 20-year gilts offering less than 3%!
Another 12% a year until 2072?
So: perhaps the market's greater yield signals shares are cheap today?
Well, it certainly paid to buy in 1952. According to the Barclays Equity-Gilt Study, anybody putting £1,000 into the market 60 years ago would now have pot worth in excess of £1 million assuming all dividends were reinvested -- equivalent to a compound return of 12% a year.
Needless to say, a repeat of that 12% return throughout the next 60 years would be most welcome!
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> Maynard does not own any share mentioned in this article.