Adelaide-based listed investment group, Argo Investments has joined its peers in reporting interim earnings lowered by the decline in corporate dividend payouts.
The trend (which has been mentioned by all investors including the industry leader, AFIC, last week), saw Argo’s profit fall in the six months to December, as the group suggested in guidance last September.
Argo reported a 23.6% decline to $71.6 million in operating profit after tax and before net realised gains on long-term investments for the six ended 31 December 2009 – down from the record $93.8 million profit in the previous corresponding period.
Directors had previously forecast a fall in profit of between 25% and 28% for the six months.
Directors declared a lowered interim payout of 12c a share, down from the 14c for the first half of 2008-09.
The latest first half result represented operating earnings per share of 12.2c compared with 16.3c in the previous corresponding period.
Argo shares fell 1% or 7c to $6.65 at the close yesterday.
Argo’s Managing Director, Mr Rob Patterson, said income from dividends continued to fall in the half year under review as some companies reduced or cancelled their dividends due to either lower earnings or to preserve cash to see them through the uncertain economic environment.
“Interest income also fell significantly due to lower interest rates earned on our cash during the period,” he said.
He said that thanks to the market rebound, Argo’s share portfolio has risen by $1 billion in 2009.
Argo said the value of its portfolio was $3.9 billion at 31 December 2009 compared with $2.9 billion a year earlier, providing a total return of 39% from the company’s portfolio for the past calendar year.
Despite the earnings downturn, the company was positive about the outlook in yesterday’s statement to the ASX.
"Due to the resilience of the Australian and Chinese economies and with some recovery in the rest of the world, we expect to see a return to growth in Australian company profits and dividends in the period ahead.
"Dividends may take longer to recover due to a combination of dilution from equity raisings, higher funding costs and a lower risk tolerance for high levels of debt on company balance sheets.
"With cash reserves of about $160 million and no debt, Argo remains ready to take advantage of opportunities as they present themselves in the share market.
"The Directors are pleased that there are no impairment provisions for the Company’s long-term investments in the new Accounting Standard AASB 9.
"Under the previous Accounting Standard AASB 139, an impairment charge was required to be booked through the Income Statement where there was objective evidence of impairment, even though no loss had been realised.
"Reflecting the improved performance in equity markets over the reporting period, net tangible asset backing per share was $6.56 as at 31 December, 2009 compared with $5.32 as at 30 June, 2009.
"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 was to be deducted, the net tangible asset backing per share would be $5.83 as at 31 December, 2009 compared with $4.95 as at 30 June, 2009.
"In view of the substantial rise in the sharemarket, very few investment purchases have been made by the Company in the half-year to 31 December, 2009.
"However, we have continued to support a number of capital raisings made by existing investments, including $4.9 million in Woodside Petroleum Ltd. and $4.8 million in National Australia Bank Ltd.
"During the reporting period, ABB Grain Ltd was taken over and our holding in Bendigo and Adelaide Bank Ltd. was sold.
"We have also reduced our holdings in James Hardie Industries N.V. and Macquarie Group Ltd.
"The global and Australian economic data continues to support improving economic conditions, with both consumer and business confidence levels continuing to rise.
"However, the pace of the recovery in 2010, particularly in the US, which has an ongoing weak housing market and high unemployment, is uncertain.
"The challenge for 2010 and beyond is for the global economy to return to more normal levels of activity.
"Following the success of the unprecedented stimulus provided by governments globally to support their economies, there are two main problems.
"These governments are now heavily indebted and are relying on low funding costs to service the debt. Also, as the stimulus is wound back and restocking of the global inventory chain is completed, the growth outlook for the global economy remains unclear.
"The Australian economy continues to be a standout in the OECD on any number of measures. This has caused the Reserve Bank of Australia (RBA) to begin removing the emergency setting of low interest rates.
"The RBA has increased interest rates, with three 25 basis point rises since October 2009, taking the cash rate to 3.75% and is likely to continue to raise rates to a more neutral setting.
"China has once again surprised with strong GDP growth recorded in 2009.
"The demand for commodities has been unprecedented as China has re-stocked or stockpiled, taking advantage of reduced prices resulting from weak demand from the Western World.
"Australia has benefited and experienced record export volumes of a number of commodities to China."
