Adelaide investment company Argo Investments (ARG) remains well cashed up, with no debt to take advantage of opportunities in the year ahead after reporting a 5% rise in net profit yesterday for the June 30 year, and a small improvement in dividend.
Directors told the market that although things are improving in the global economy, the company not banking on any significant improvement in corporate earnings and dividends in the 2013-14 year.
"We do not expect strong earnings growth from Australian companies over the coming year and therefore predict only modest dividend growth. However, we believe the overall yield available in the Australian equity market remains attractive.
"Argo has no debt and with cash reserves of $196 million, remains of the view that for a long-term investor, the Australian equity market is relatively good value. As a result, we will continue to selectively invest funds into quality, well managed companies with solid cash flows and dividend streams," Argo said.
Argo said profit increased 4.6% to $175 million and earnings per share rose 3.4% to 27.7c per share.
Argo shares rose 4c to $6.99 after the result was released.
ARG YTD – Argo outperforms with $175m profit
"This pleasing outcome was achieved due to increased dividends and distributions received from the investments in Argo’s portfolio, partially offset by a decline in interest income on cash deposits due to the lower interest rates available this year," directors said in yesterday’s statement.
The company lifted final dividend half a cent to 13.5c a share, making a total payout for the year of 26.5c (up half a cent with the steady interim of 13c a share).
Directors said that for "some time, Argo has prioritised investments in larger, well capitalised companies with relatively high, predominantly franked, dividend yields and scope for dividend growth.
"This has been a successful strategy which has delivered strong portfolio performance in the 2012/13 financial year, as investors in Australia seek to acquire these types of securities in their search for yield in an environment of low interest rates.
"The global economic outlook is showing signs of improvement, particularly in the U.S. However, some structural challenges remain in Europe and markets are wary of slowing growth in China.
"Domestically, the Australian economy appears sluggish.
"In response, the Reserve Bank of Australia continues to cut interest rates in order to stimulate the non-resource segments of the economy in particular. The possibility of slowing Australian economic growth has seen the Australian dollar fall almost 15% against the U.S. dollar since mid-April, as international investors take profits.
"However, the weaker currency and further interest rate cuts should provide some relief and stimulate consumer spending and business investment in Australia," directors added
In addition, Argo said its investment portfolio outperformed the broader Australian share market, returning 23.6% (measured by the movement in net asset backing per share assuming dividends paid are reinvested), compared with the S&P/ASX All Ordinaries Accumulation Index which returned 20.7% for the year.
"The strong performance of higher yielding stocks and the relative under- performance of the mining sector over the period both contributed to this result."
During the year, $224 million was spent on investment purchases, partly funded by $143 million in disposals and takeover proceeds. The largest purchases were additions to holdings in Australia & New Zealand Banking Group and Wesfarmers. The largest sale was a reduction in the Macquarie Group position. The cash balance at year end was $196 million, representing 4.7% of the company’s total assets of $4.2 billion.
The Share Purchase Plan and Dividend Reinvestment Plan were well supported by shareholders during the year and raised $76 million and $31 million respectively for further investment. Argo now has over 70,000 shareholders and more than 640 million shares on issue.
During the year, the number of stocks in the portfolio was reduced as several holdings were sold due to deteriorating industry conditions or other concerns. In addition Alesco Corporation, Australian Infrastructure Fund, Consolidated Media Holdings and Hastings Diversified Utilities Fund are no longer held due to takeovers or corporate activity.
At 30 June 2013, Argo said its portfolio was diversified across 98 different equity holdings and cash. The 20 largest holdings accounted for 63% of total assets and provided 64% of the company’s income for the year.
The best performing stocks in its portfolio – all of which increased in price by more than 60% – were Macquarie Group (also the single biggest sell down), Peet, Primary Health Care, Insurance Australia Group, Twenty-First Century Fox (part of the old News Corp), Ramsay Health Care, Aristocrat Leisure and Fletcher Building.
