Argo Investments (ARG), the country’s second biggest listed investment company, outperformed the market in the half year to the end of December, thanks in part to a couple of demergers. But despite that, the dividend was lifted only half a cent to 13.5c fully franked.
But that was all the confidence seen in the company’s interim report released yesterday. Like some of its peers, such as Australian Foundation, Argo’s board and management are very cautious about the outlook.
The company’s portfolio rose 14.3% for the six months (similar to AFIC’s) against the 14% gain for the ASX 200.
Argo’s half-year profit increased by 18.1% to $101.9 and earnings per share rose 15.3% to 15.8c per share (1.35c of those are being paid out to shareholders).
The company said it received increased dividends and distributions from the investments in its portfolio, partially offset by a slight decline in interest income on cash deposits, due to the lower interest rates available during the half-year.
"The result was boosted by $6.9 million of non-cash, one-off income items, being two demerger dividends resulting from the demergers of Recall Holdings and Orora by Brambles and Amcor respectively, and a special dividend due to the in-specie distribution of Sydney Airport securities by Macquarie Group to its shareholders.
"This compares to a demerger dividend of $0.6 million in the previous corresponding period, when Woolworths demerged SCA Property Group," the company said yesterday.
All in all a steady as she goes result as the company did a bit better than the market overall.
ARG 1Y – Argo lifts profit, dividend, but very cautious on rest of 2014
But that was last year, looking to the future Argo directors were much more circumspect in yesterday’s statement, as were directors of AFIC last month. In fact both boards could have been speaking from the same briefing notes.
"With the average dividend payout ratio of companies in the S&P/ASX 200 Index approaching the higher end of its historic range, at around 75%, we believe earnings growth will be required in order to drive further dividend growth," Argo directors said.
"Within this framework, we expect only limited earnings and dividend growth from Australian companies in the coming year. However, we believe the overall yield available in the Australian equity market remains relatively attractive.
"We expect IPO activity to continue into 2014, and although demand for better quality businesses remains, the pricing of prospective IPOs will be very closely assessed following the disappointing initial market performance of some of the listings in late 2013.
"Argo has no debt and with cash reserves of $195 million remains of the view that for a long-term investor, the Australian equity market is fair value. We look forward to meeting our investee companies over the upcoming corporate results reporting season to review how their businesses are adapting to the current economic conditions.
"We will continue to selectively invest funds into quality, well managed companies with solid cash flows and dividend streams," the company said in yesterday’s statement.
During the six month period, Argo spent $76 million on long-term investment purchases, partly funded by $47 million in disposals. That was a total of $123 million in market activity during the six months, or around $5 million a week.
"Larger purchases included additions to holdings in Westpac Banking Corporation, Australia and New Zealand Banking Group, Wesfarmers and DUET Group. The largest sales were reductions in the holdings of two listed investment companies, Australian United Investment Company and Diversified United Investment.
"The cash balance at the end of the calendar year was $207 million, representing 4.4% of the Company’s total assets of $4.7 billion.
"The number of stocks held in the portfolio increased to 103 during the half-year. Contributing to this was a sharp increase in initial public offering (IPO) activity. The December quarter was the second highest quarter of IPO issuance in Australia since the global financial crisis and Argo’s investment team analysed a large number of opportunities.
"Although we only participated in a small number of IPOs as most were considered to be fully priced, long-term positions have been added to the portfolio in Affinity Education Group, Pact Group and Steadfast Group. In addition, two holdings were gained when Brambles demerged Recall Holdings and Amcor demerged Orora," the company said.
The only holding exited during the half-year was Seven West Media, which was a thumbs down for the Kerry Stokes media empire.
Argo said its best performing stocks in the portfolio during the half-year were Arrium, Challenger, Programmed Maintenance Services, Crown Resorts, Perpetual and Downer EDI, all of which increased in price by more than 40%.
"This was somewhat offset by poor performances from QBE Insurance Group, OZ Minerals and Newcrest Mining, which all fell by over 20%," the company said.
The shares edged down a cent to $7.28.
