Adelaide-based listed investment company Argo Investments (ARG) has joined its bigger rival, the Melbourne-based Australian Foundation Investment Co (AFIC), in cautioning shareholders that the coming year will be a bit tougher and slower than previously realised.
AFIC shareholders were told at their AGM earlier this month that while the outlook was positive, consumers remain cautious and Australian companies were still adapting to the economy’s slow transition to growth drivers different to the resources investment boom.
Yesterday, Argo told its shareholders at the AGM to expect weak earnings growth in Australia over the coming year as subdued economic conditions force companies to cut costs.
And like its peers, such as AFIC and Milton Corp, Argo likes banks and materials companies such as the CBA, Westpac and BHP Billiton and is partial to a few million extra Wesfarmers shares as well.
In fact, since June 30, the company has lifted its stake in the banking sector (and nicely timed that move as well, with many of the big banks hitting new all time highs). Energy companies have also been favoured (Woodside and Santos).
Speaking at the company’s annual general meeting Argo chief executive Mr Jason Beddow said the sluggish Australian economy had led to a lack of new investment decisions being made across a number of industries.
"The Australian economy appears sluggish and companies continue to reduce costs to compete in the current economic conditions. This has led to a lack of new investment decisions being undertaken across a number of industries.
"Against this backdrop, we do not expect strong earnings growth from Australian companies over the coming year and therefore predict only modest dividend growth, particularly with the payout ratio of companies in the S&P/ASX 200 Index approaching the higher end of their historic range, at around 75%.
"Nevertheless, modest earnings improvement should allow for some growth in dividend payments from those companies.
"We are closely monitoring outlook commentary given at Annual General Meetings held at this time of the year for any earnings updates.
"Argo has no debt and with cash reserves of approximately $200 million, remains of the view that for a long-term investor, the Australian equity market is relatively good value.
"As a result, we will continue to selectively invest funds into quality, well managed companies with solid cash flows and dividend streams," Mr Beddow told the AGM.
And chairman Ian Martin told the meeting, "In Australia, while improving global conditions will underpin demand for our resource exports, it is also clear that the economy will continue to be buffeted by some powerful divergent forces: particularly the slowing in resource sector capital expenditure; the impact on competitiveness of the stubbornly high Australian dollar; and on the positive side of the ledger, the stimulatory impact of lower interest rates and improved business confidence since the election".
ARG YTD – Argo flags flat year ahead
Argo’s biggest investment for the financial year was a $32.1 million stake in ANZ, which seems to have paid off in the short term, with the bank hitting a series of new highs in the past week, including yesterday.
It also invested $20.6 million in Wesfarmers and $17.3 million in Westpac (which has also enjoyed a big run and hit a new high yesterday). Westpac remained its top stock at September 30, while Wesfarmers is still the company’s 4th biggest investment.
The group sold its stake in Australian United Investment Company and Diversified United Investment resulting in $20.1 million and $15.4 million returns respectively.
"The proceeds will be re-deployed in a more concentrated manner into our preferred stocks.
"‘Since this time last year, our main changes have been an increase in our weighting to banks and energy and a decrease in listed investment companies,’’ Mr Beddow said.
Argo’s top 20 investments include BHP Billiton, Ramsay Health Care, Twenty-First Century Fox, Woolworths, Milton Corp, Telstra, NAB, CBA, CSL, Woodside, Macquarie Group and Santos.
Banks accounted for 22% of its portfolio, with materials (led by BHP and then Rio Tinto) its second highest weighting at 15%.
"We have continued to prioritise investments in larger, well capitalised companies with relatively high, predominantly franked, dividend yields and scope for growth," Mr Beddow said.
Mr Beddow said the company had spent $32 million on further investment purchases since June, with major buys in Wesfarmers, Commonwealth Bank, Steadfast Group, Telstra and Brambles.
Argo shares ended yesterday steady at $7.27, despite the 1.1% gain on the wider market.
