Tabell’s Market Letter – August 03, 1962

/ . — I fiLE COpy Walston &Co. Inc Members New York Stock Exchange NEW YORK SAN FRANCISCO LOS ANGELES PHILADELPHIA CI-YCAGO OFFICES COAST TO COAST AND OVERSEAS TABEll'S MARKET lETTER August 3, 1962 After reaching a new high of 601. 15 early in the week, the Dow-Jones Industrial average failed to follow through, and our breadth index mirrored this action, also fail- ing to better its early July high. A further attempt at an upside penetration by the Indus- trials and! or the breadth index, is to be expected in the future. Far more important than guessing what the market is going to do, however, is being prepared to take prOp2r steps whatever it does. Basically, this letter continues to feel that the 650-550 range will contain the market over the near future. Accordingly, we would advisesale of ifisues on to th, 600-650 area, and pur- chase of stocks which appear to be of sound value, on weakness into the 600-550 range. Accelerated depreciation schedules have already been enacted and, although an immediate tax cut remains a question mark, the possibilities remain good for some futuI'E tax reform. These measures will have an appreciable effect on company earnings and the effect will vary with each individual company. It will necessitate a much closer look at cash flow or cash earnings. Cash flow consists of net earnings plus depreciation. In re- cent years, cash flow earnings have been increasing at a greater rate than reported earn- nings. In the four-year period between 1947 and 1950, cash flow earnings on the Dow- Jones Industrial average were about 340/0 above reported earnings. In the most recent four-year period between 1958 and 1961 cash flow earnings averaged 750/0 above reported In 1950, the earnings on the Dow-Jones Industrial average were 30.70. Eleven years later, in 1961, reported earnings were 31. 83 or an increase of 3.60/0. Cash flow earnings on the Dow-Jones Industrials, however, increased from 40.85 in 1950 to.57.25 in 1961 for an increase of almost 400/0. It is, of course, arguable that an increase in necessary. The main object of a depreCiation allowance is to allow !or 0'(' quipment as it wears out, and it is certainly true that in most tak reater replacement a ghTen level of earnings the sharp lncrease ln cash flow as th .. rmngs over tile past ten – years is rather dramatic. Standard & Poor's vWin eDe, ng advertisement in some of last Sun- day's newspapers relative cash flow and the effect of accelerated de- preciation and pOSSilel ed tit5ns on earnings and dividends. As an example, a hypothetical co ' e 5 lllion before taxes and depreciation. It s deprecia- tion, figuring a 0 years, was 50 million. Assuming a capitalization of ten million r Led net ea rnings were 4.80 and cash flow earnings were 9.80 under the pres 20/0 corporate tax rate. With the rec ntly accelerated depreciation, the company uses a twelve-year basis for depreciation instead of fifteen years. The result would be a lowering of reported earnings to 4.32 a share, or On the other hand, cash flow earnings WJ uld be 10.82 or an increase of If there is a reduction in the corporate tax rate from 520/0 to 470/0, the effect could be quite material. In that event, reported earnings WJ uld be 4. 77 a share or about the same as the present 4. 80, but cash flow earnings would increase from 9.80 to 10.77 a share. If, in addition, the pending Incentive Credit of a 70/0 tax write-off on the cost of new equipment were enacted, it would add another a share to cash flow earnings. Cash flow earnings are important as far as dividends.are concerned. In the pertod between 1948 and 1961, the dividend payout on the reported earnings of American corporations varied over a wide range between 350/0 and 660/0. The payout rate on cash earnings, however, was very steady during this same period. It varied only from 270/0 to 330/0. As- suming a 300/0 dividend payout of cash earnings on the hypothetical company mentioned above, and no change in earnings before taxes and depreciation, the result would be a 2.94 dividend on the present 9.80 a share cash earnings, a 3.09 dividend under the new depreciation schedule, and a 3.51 dividend if the corporate tax rate is reduced to 470/0. As mentioned above, the results will vary with each company. Some companies will in reported earnings and little savings in depreciation, while other com- pames will show lower reported earnings but better cash flow and have better dividend coverage. Dow-Jones Ind. 596. 38 EDMUND W. TABELL Dow-Jones Rails 122.26 WALSTON & CO. INC. This market letter is not, and under no circumstances 18 to be eonstnIed 811, an offer to Bell or a soliCitation to buy any securities referred to herein. The information contained herein 18 not guarAnteed 8.11 to accuracy or completeness and the furnlahmg thereof IS not, and under no drcumstanees is to be construed M, 0. rePresentar tlOn by Walston & Co., Inc. All expressions of opinion are subJect to change without notice Walston & Co. Ine. and Direetors, Stoekholdere atld Employees thereof, purchase, sell and may have an interest in the securitl8 mentioned herein. Thie market letter is intended a.nd presented merely &8 8. general. informal commentary on day to day market news anq. not as a complete anab'lIls. Additional mformatlon With respect to any seeurltles referred to herein will be furnished request. . WN 301 – …… – ' -C 0-