Melbourne-based listed investor, Djerriwarrh Investments (which is affiliated with the larger Australian Foundation investment Company) will pay a steady final dividends of 10 cents a share after reporting weaker earnings and an undershooting the performance of the ASX 200 in the year to June 30.
After a steady 10 cents a share interim, the company’s total payout for 2017-18 is 20 cents a share.
Djerriwarrh said its portfolio return including franking for the twelve months to 30 June 2018 was 11.7%, “whereas the return from cash, as measured by the Bank Bill Index, was 1.8% and the S&P/ASX 200 Accumulation Index return including franking was 14.6% (franking added 2.9% to Djerriwarrh’s return and 1.6% to the Index)."
Profit for the year was $31.4 million, down 6.6% from $33.7 million in the corresponding period last year.
“The major reason for the decline was an increase in unrealised losses from call option positions (these losses can arise when prices on the underlying stocks increase in value, but often reduce as options approach expiry),” the company said in yesterday’s release.
"There was also a reduction in contribution of the Trading Portfolio compared with the prior corresponding period, as the gains made last year were not repeated this year. In contrast, there was an increase in dividends received, following adjustments to the portfolio, as well as a large uplift in income from material and energy companies.
The major reason for the decline was an increase in unrealised losses from call option positions (these losses can arise when prices on the underlying stocks increase in value, but often reduce as options approach expiry).
"There was also a reduction in contribution of the Trading Portfolio compared with the prior corresponding period, as the gains made last year were not repeated this year. In contrast, there was an increase in dividends received, following adjustments to the portfolio, as well as a large uplift in income from material and energy companies,” directors said.
Djerriwarrh said it “typically has call options written over 30% to 50% of the portfolio (average coverage for the year was 43%, and was 39% at the end of June following the exercise of some call options).”
"In a relatively strong market, the portfolio return normally would be below the S&P/ASX 200 Accumulation Index as call option positions can limit the amount of capital growth into the market strength, particularly as it becomes uneconomic to buy back in-the-money positions. In addition, a large part of the return in the resources sector came from the small and mid cap resources, which were up 49.0% and 42.3% respectively.
"These segments of the market are not typically within Djerriwarrh’s investment universe given the absence of fully franked dividends and an options market.
"The more significant contributors to Djerriwarrh’s portfolio performance over the year were BHP, CSL, Macquarie Group, Wesfarmers and Rio Tinto.
There were several factors influencing activity in the portfolio over the year. A number of large companies are facing growth headwinds, which means a more subdued outlook for their dividends.
In this context, Djerriwarrh repositioned the portfolio by adding to holdings with a better outlook for dividend growth whilst reducing some positions where growth is more challenged. I
Purchases included Macquarie Group and Sydney Airport, whilst sales arose across several holdings, including Telstra, QBE Insurance and Healthscope, and the complete disposal of the holding of Incitec Pivot shares.
In addition, in the rising market where a number of holdings with option positions rose strongly, purchases were made in advance of the likely exercise of these call options. This included companies such as BHP, CSL, Macquarie Group and Woolworths.
Several new companies were added to the portfolio during the year, including Janus Henderson Group, Atlas Arteria, Reliance Worldwide and Ansell.
Director said that "5 cents of the final dividend is sourced from taxable capital gains, on which the Company has paid or will pay tax. The amount of the pre-tax attributable gain on this portion of the dividend, known as an “LIC capital gain”, is therefore 7.14 cents. This enables some shareholders to claim a tax deduction in their tax return.”
“The Company’s Dividend Reinvestment Plan (“DRP”) is in operation for the final dividend with a 2.5% discount.
The shares eased 0.5% to $3.45.
