There's a 'chicken and egg' argument about the recovery in the price of Argo investments, the country's second largest listed investment company.
In the big sell off a fortnight ago the shares plunged to a low of around $7, but have recovered as the market has gradually retrieved the losses since January 1.
And yesterday they regained $8 with an 18c gain after a solid interim result which showed Argo had survived the market volatility without any damage, as had its peers in Australian Foundation and Milton Corporation. The shares eased in late trading to close at $7.94, up 12c.
So what came first as a factor, the market recovery (which faded yesterday afternoon) or the solid earnings statement?
It's hard to tell but there was ample evidence of confidence and caution in equal mixtures at Argo, just as there was last week at AFIC.
Both companies have reactivated their dividend reinvestment programs and are offering shareholders a chance to buy up to $5,000 in new shares at a price 2.5% less than the market average (much like the discount on the DRP).
Argo's offer is in two lots of 2,500 shares each (or $20,000) and the company expects it to be well supported by small shareholders after the interim profit after one off items jumped 114.2% to $196.807 million, up from $91.891 million in 2006.
The result is a bit misleading-around $104 million – came from the sale of securities after takeovers in the first half so a better guide was the 32.7% rise in underlying earnings, from $70.1 million to a record $93.1 million for the latest half.
Like AFIC, Argo is asking shareholders to show confidence in its management and the market by taking up the discount offer, and perhaps the DRP as well.
Argo said those one-off gains came from long-term investment sales, mostly due to takeovers: they totalled $103.7 million in the first half, compared with $21.7 million in the previous corresponding half-year.
They included gains from the Bank of Bendigo merger with Adelaide Bank, the takeover of Alinta, Coles Group, Rinker Group and Southern Cross Broadcasting.
The current half might not see as many takeovers completed, although the biggest of them all, BHP's bid for Rio, is still a possibility.
Argo said its significant investments in the half included $19.6 million in QBE Insurance, $14.9 million in Westfield Group and $13.0 million in the National Australia Bank.
At December 31, 2007 the company was cashed up with $350 million in the bank, but some of that has already been spent picking up bargains during last month's stock market correction.
Argo will pay an interim fully franked dividend on March 4 of 14c. Argo's investment portfolio returned 14.0% in calendar 2007.
During the half-year, Argo purchased an unlisted investment company with assets of approximately $62.0 million, mainly cash. Over 5.963 million shares were issued to pay for it.
Argo said the record operating profit includes a $5.5 million dividend from Macquarie Group which has traditionally been received in December each year.
Due to the recent Macquarie corporate restructure, payment of the dividend was made in January 2008 on a one-off basis. Macquarie is Argo's single largest investment.
Argo's Managing Director, Mr Rob Patterson, said the result continued the strong growth in income from dividends, interest and trust distributions from stocks held by the Company. It also includes a contribution from the $446 million of new capital raised in Argo's oversubscribed one-for-eight rights issue at $7.20 per share in March 2007.
Argo Chairman, Chris Harris, said that the Company remained well positioned in the current environment with about $350 million in cash reserves at 31 December 2007 with no debt and ready to take advantage of any further opportunities in the share market.
"While the current outlook for global share markets is plagued with uncertainty, Argo's operating profit relies more on the continuing profit and dividend paying prospects of the Australian listed stocks within our diverse and high quality investment portfolio," he said.
"For the time being, company profits and dividends in Australia are sound as the economy remains strong, although it is expected to moderate under the weight of the increases which we have seen in interest rates and energy costs as well as the drought and the strong Australian dollar."
The company said the "current outlook for global sharemarkets is plagued with uncertainty, however, Argo's operating profit relies more on the continuing profit and dividend paying prospects of the Australian listed stocks within our diverse and high quality investment portfolio.
"For the time being, company profits and dividends in Australia are sound as the economy remains strong, although it is expected to moderate under the weight of the increases which we have seen in interest rates and energy costs, as well as the drought and the strong Australian dollar."
The Share Purchase Plan (SPP) will be offered in March 2008 to allow eligible shareholders the opportunity to purchase additional Argo shares up to a maximum value of $2,500. The maximum amount that a shareholder can invest in any twelve-month period pursuant to the SPP is $5,000 and it is the Directors' current intention to offer the SPP to shareholders each half-year at which time up to $2,500 can be invested.
Net tangible asset backing per share was $8.17 as at 31 December, 2007 compared with $8.28 on 30 June, 2007.
As a long-term equity investor, Argo does not intend to dispose of its long-term investment portfolio. However, if estimated tax on unrealised portfolio gains were to be deducted, the net tangible asset backing per share would be $6.96 on 31 December, 2007 compared with $6.97 on 30 June, 2007.
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