A different strategy from Argo Investments (ARG), our second largest Listed investment company (LIC) to come out of the competition in the year to June 30 and beyond.
Compared to the strategy changes for the likes of the companies grouped around Australian Foundation Investment Co (AFI) and some other LIC’s Argo’s share selection was very different, and it also took a different approach to rewarding shareholders as well.
The company reported a 5.2% fall in full-year profit to $216.3 million, with the company citing lower returns on cash deposits and a drop in dividend returns from its investment portfolio.
Profit for the 12 months to June 30 was down from $228.1 million a year earlier as Argo’s returns on investment fell 1.2% – an outcome that many other LIC’s also experienced.
Argo’s profit fall was driven by a 17% slide in second half earnings – from $123.3 million in the final half of the 2014-15 year to $102.1 million in the six-months to June this year.
But instead of pulling its horns in a little and either trimming or maintaining an unchanged payout to shareholders, the Adelaide-based Argo has decided to pay shareholders a record annual dividend of 30.5 cents a share after declaring a final of 15.5 cents a share.
That’s one cent a share above the 2014-15 payout, the fourth increase and annual dividend and returns the shareholder reward to the level it was at before the GFC.
Argo directors said that the demerger between BHP Billiton and South32 played a large part in the profit decline. If the one-off $18.6 million income benefit from the spin-off in last year’s accounts is discounted, Argo’s profit rose 3.2% from 2014-15.
But that is a hypothetical outcome as the tax benefit from the South32 demerger was a very definite event the previous financial year.
Revenue dipped 5.7% to $228 million as investment returns and dividends from the company’s share investments fell.
Argo’s investment portfolio returned negative 1.2% over the year “characterised by macroeconomic and political uncertainty” as volatility rose for a number of reasons at the turn of the year and into the early months of 2016.
But what was striking about Argo’s investment approach was the way it stuck with the its existing investments in the market, rather than selling down some major under performers and moving further into midcaps (such as AFIC and some of its associated companies did in the year).
Argo managing director Jason Beddow said the large-cap strategy would continue to pay off in the long run.
“Although the skew of Argo’s long-term portfolio to some of the larger sectors may have negatively impacted our relative performance this year, these broad portfolio settings will continue to deliver solid growth and dividend income for the company and its shareholders in the longer term,” Mr Beddow said in the release to the ASX.
He said companies with above-market dividend growth would be well supported in the market, despite valuations already being excessively inflated. “With abundant and increasing global liquidity, we believe that despite the potential for rate increases in the US, the yield thematic will continue to be a dominant consideration for the remainder of the year.”
Mr Beddow said Argo took advantage of volatility in the market to build stakes in existing stocks and to add new companies to the group’s range of investments. These included stakes in CBL Corporation, Estia Health, Genworth Mortgage Insurance, McGrath, M2 Group, Reliance Worldwide and Rural Funds Group.
It added to its holdings in Westpac and the Commonwealth Bank, for instance, as well as Santos, Duet and Origin Energy.
Some of the group’s biggest sell-downs included Medibank Private, CIMIC Group (the old Leighton Holdings), UGl and Clydesdale Bank (after the spin off from the NAB), all of which were completely sold from the Argo portfolio.One interesting sale was that of some of the company’s stake in a fellow LIC, Milton Corporation of Sydney.
Other stocks sold down or quit included Whitehaven Coal, OZ Minerals, Colorpak (takeover), Newcrest Mining and Amaysim.
Overall during the past year, Argo said outlaid $218 million on long-term investment purchases, partly funded by $115 million in disposals and takeover proceeds.
The shares rose 0.4% to $7.51 in yesterday’s generally stronger market.
Looking to the rest of the year Mr Beddow was cautious, noting that yields globally continue to fall to historic lows, pushing investors out of cash into more risky, higher yielding asset classes, including equities, thereby inflating their valuations. Premiums are being placed on stocks that are delivering earnings and dividend growth, but we feel this is becoming excessive in some areas.
“However, with abundant and increasing global liquidity, we believe that despite the potential for rate increases in the US, the yield thematic will continue to be a dominant consideration for the remainder of the year, with companies that have above-market dividend growth likely to continue to be well supported,” he said in the statement.
"We see some challenging times ahead, particularly internationally. Global political risk and uncertainty is increasing, which is eroding confidence.”
Mr Beddow said that “while Australia is not immune from these global influences and trends, we continue to experience solid population growth, which we feel is essential for continued economic growth, particularly to offset a slowdown in productivity.”
“Interest rates are likely to continue to be supportive, with the RBA lowering the cash rate by 0.25% to 1.5% at its August meeting and leaving open the possibility of further cuts through 2016 and 2017,” he said.
