Friday gave us a good idea of the way most of the listed investment company (LIC) sector will report interim results with the December six months results from Djerriwarrh Investments (DJW), stablemate of the country’s biggest LIC, Australian Foundation Investment Co (AFIC).
AFIC is due to report its interim figures today and it looks like good news and a higher dividend is in store if the DJW figures are any guide (and they usually are).
The results from DJW also revealed that it had not only rationalised its investment portfolio, but also restructured it to set it up for future growth – we are likely to see a similar news from AFIC today (Monday).
DJW not only reported a higher interim profit because any of its companies either resumed paying dividends (after the cutbacks of 2020) or had lifted payouts from low levels set the year before by banks in particular).
Interim dividend has been increased to 6.75 cents a share fully franked, up 28.6% from 5.25 cents a share fully franked for the corresponding period of 2020.
DJW said the increase was as a result of higher company dividends and improved income from option activities.
Profit for the half-year (including unrealised gains or losses on open option positions) was $19.6 million, up 142.2% from $8.1 million in the December 2020 half. DJW said that net operating result for the half-year was $18.1 million, 54.4% up from $11.8 million in the previous corresponding period.
DJW Directors said they viewed this measure, “which excludes the impact of open option positions, is a better measure of the Company’s income from investment activities.”
Revenue from operating activities was $15.1 million, 57.2% up from $9.6 million in the previous corresponding period. This includes dividends and distributions received from the Company’s investment but excludes trading and option income and capital gains on investments.
The Portfolio return for the six months to December 31 2021 including franking was 6.7%, ahead of the S&P/ASX 200 Accumulation Index return including franking of 4.6%. The 12- month portfolio return to 31 December 2021 including franking was 20.6%, whereas the S&P/ASX 200 Accumulation Index return over the corresponding period including franking was 18.7%.
Looking to the rest of the year, directors were positive: “The outlook for company dividends for the next six months is largely positive. This is based on our assessment of company outlook statements, balance sheets and dividend payout ratios.”
“Beyond this, iron ore prices will be a major determinant given their enormous influence on the level of profitability and dividends produced by BHP and Rio Tinto.
“We expect some normalisation in iron ore prices and BHP and Rio Tinto’s dividends from financial year 2022 onwards acknowledging there is a great deal of potential variability in these outcomes as global economic conditions remain fluid.”
Perhaps the most interesting moves were with the structure and nature of the portfolio.
DJW said it was “active sellers of our remaining holdings in APA Group, Alumina, Orica and Origin Energy, and we reduced our positions in companies such as Brambles and Woodside Petroleum.”
“Some of the capital realised from these sales was re-allocated into a number of other companies. This is a continuation of our portfolio strategy where we aim to maintain a diversified portfolio of high-quality companies that can deliver Djerriwarrh the appropriate balance between income and growth.”
“(The) trend in dividend payments from our portfolio holdings was generally positive during the period as we saw a strong bounce back from the COVID-19 impacted dividend levels of prior periods.
We received significantly higher dividends from BHP, Westpac, IAG and National Australia Bank. We also saw solid increases in dividends received from Equity Trustees, ASX and Woolworths from higher dividend rates and our increased holdings in these companies.
In contrast, lower dividend income was received from APA Group, Brambles, Woodside Petroleum and Sonic Healthcare, as a result of reduced holdings in these companies (in the case of Sonic Healthcare because of the exercise of call options).
That half year saw the company add to a number of its key portfolio holdings at prices where we saw long term value.
“These major purchases included BHP, Wesfarmers, Coles, Commonwealth Bank, Westpac, Ramsay Health Care, Auckland Airport, Equity Trustees and CSL. We also actively added four new companies to the portfolio. JB Hi-Fi and SCA Property Group were purchased primarily for their attractive dividend yields. Cochlear and Domino’s Pizza were purchased for their attractive long term growth profile,” directors explained.
They also pointed out that the profitability of the banks will also have a large influence on dividend levels across the Australian sharemarket. The banks finish the calendar year in very good shape, with each of the major banks holding surplus capital, along with low levels of bad debts given the strongly rebounding domestic economy.
However, this could change quickly as a result of any negative developments in the economy.
The topic of inflation is a key macroeconomic issue globally, with any strong sense that inflation levels are more than just transitory likely to result in higher interest rates, particularly if COVID-19 related disruptions to supply chains and availability of labour prolong these inflation risks. Real estate and infrastructure are the two sectors that are typically the most sensitive to interest rate changes, but we note that equity markets overall have clearly benefitted from lower interest rate levels in recent years, DJW directors said.
