Melbourne-based Listed Investment Company (LIC), Djerriwarrh Investments has maintained final and full-year dividends after reporting a reasonable rise in earnings for the year to June.
The company is a stablemate to Mirrabooka Investments, which reported last week and Australian Foundation Investment Co and Amcil, both of which release their 2018-19 figures next week.
Djerriwarrh said yesterday that final dividend will be a steady 10 cents a share, making a total for the year a steady 20 cents a share.
The company reported a 4.5% rise in earnings to $37.6 million, while the net profit attributable to members was $34.3 million, 9.2% up from $31.4 million in the 2017-18 financial year.
Investors gave the result a cautious thumbs-up with the shares up half a percent to $3.63.
Revenue from operating activities was $39.9 million, up 15.7% up from the previous corresponding period.
The portfolio return for the year, including franking, was 9.1%. That compares to the 13.4% rise in the ASX 200 Accumulation Index.
Directors explained that underperformance:
The higher earnings came from an increase in investment income, which included the recognition of a dividend from the Coles demerger from Wesfarmers and a special dividend from BHP.
On top of that, there was a smaller income contribution from option activity, as a significant number of in-the-money call option positions were bought back and rolled over into the current financial year at higher exercise prices to capture more of the potential capital upside of these holdings; and
In the commentary on 2018-19 directors noted “The relative portfolio performance over the 12 months to 30 June 2019 was the outcome of the following key factors:
“In many instances, it was uneconomic in the strongly rising market in the second half of the financial year to buy back and move in-the-money call option positions to higher exercise prices to try and capture more capital growth. As a result, a number of call options were exercised at a lower price than was prevailing in the market at the time.
“In addition, “buying stock and writing of call option” transactions to maintain exposure to selected holdings meant option coverage remained at the upper end of the range with these covered purchases.
“Whilst this activity is important for income generation, it can detract from capital growth, “ directors explained.
“Participation in the BHP and Rio Tinto off-market buy-backs, that generated significant franking credits for the Company, also provided some headwind to performance as holdings were sold at a 14% discount to the market at the time.
“Finally, Djerriwarrh does not own gold stocks in the portfolio, which have been very strong recently in response to global political uncertainties, or many real estate trusts, which have risen as investors respond to lower bond yields.”
The company said the more significant positive contributors (including dividends and option income) to Djerriwarrh’s portfolio performance over the 12-month period were BHP, Commonwealth Bank, Telstra, Brambles, and CSL.
“In contrast, companies such as CYBG (Clydesdale Bank) and Challenger, both of which were sold during the second half of the financial year, significantly underperformed. Current holdings in Adelaide Brighton, James Hardie Industries and Reliance Worldwide were negatively impacted by weaker industry conditions in their respective markets
And like Mirrabooka last week Djerriwarrh has slimmed down its share portfolio.
“In total, the number of holdings in the Investment Portfolio was reduced from 74 to 59 over the year. This reduction also reflected a greater focus on companies where there is a better prospect of generating income from writing call options over these holdings in a more uncertain environment.
“A number of purchases were made through the period to restore positions that were sold because of the exercise of call options. The largest of these were BHP, Wesfarmers, Transurban (including participation in its rights issue) and APA Group. National Australia Bank was the other large purchase, given the very attractive dividend yield on offer at the time. New holdings added through the period were Adelaide Brighton, OZ Minerals and Medibank Private,” the company said in yesterday’s statement.
