Shares in Adelaide-based listed investment company Argo (ARG) edged up, then eased yesterday after the company revealed a reasonable interim result and higher dividend.
The shares closed at $7.51, down 0.6%, after rising to a day’s high of $7.70 on a day when the market traded higher, with a slight easing in afternoon trading.
Argo reported an 8.9% rise in net after tax profit of a record $114.2 million for the first half of 2015-16.
Interim dividend was lifted to 15¢ a share from 14¢ per share for the six months to December 2014. Earnings per share rose 7.6% to 17 cents a share.
Argo’s interim results were similar to those reported last month by rival investment companies such as Milton Corp, Australian Foundation and Acmil, although unlike the latter two groups, Argo didn’t lighten its holdings in the big banks.
And the company wasn’t all that positive about the outlook, looking for continued subdued trading for the economy and many companies. Mr Argo says it was a patient investor and expects value to appear as the year progresses.
Argo said its investment portfolio of stocks returned 2.8% in the 2015 calendar year, beating the S&P/ASX200 Accumulation Index which returned 2.6% over the same 12 months.
CEO Jason Beddow said in a statement yesterday that the group’s “profit growth was mostly due to higher dividends and distributions from the investments in the portfolio, with the increased market volatility assisting our option writing income strategy.
"Income from option activity and trading opportunities was $7.3m for the half-year, significantly above the $2.1m earned in the previous corresponding period.
"While modest, the first management fee contribution to Argo’s revenue from managing Argo Global Listed Infrastructure Limited (AGLI) was also included. There was a slight decline in interest income on cash deposits, due to lower cash balances and interest rates. Administration expenses increased, mostly reflecting the additional resources required for the establishment and ongoing management of AGLI.
"Although the Australian equity market ended the calendar year at a similar level to which it started, there was considerable volatility during the year. In this environment, Argo’s portfolio outperformed the index, with a total portfolio return of 2.8% and total shareholder return of 7.0%, both exceeding the S&P/ASX 200 Accumulation Index return of 2.6% for the same period.
"Argo’s portfolio has also been impacted during the year, and although our performance relative to the index was helped by an underweight position in resource companies, this was somewhat offset by our overweight positions in Origin Energy and Santos.
"In a relative sense, the stocks in the portfolio which contributed most positively to performance during the calendar year were AP Eagers, Macquarie Group, Ramsay Health Care, Technology One and Sydney Airport. Underweight positions in CSL and Commonwealth Bank of Australia, and not owing Qantas, negatively impacted relative performance,” Mr Beddow said yesterday.
Argo said that many of these investment purchases resulted from capital raisings in the half year. "The four major Australian banks all raised significant amounts of new equity in 2015, primarily in response to the increasing capital requirements of regulators. In addition, the balance sheets of many energy companies have come under significant pressure due to ongoing oil price weakness, prompting capital raisings from Santos and Origin Energy,” the company said yesterday
Overall, the number of stocks held in the portfolio increased slightly over the half-year to 104. Argo’s cash balance at December 31 was $98 million, or 2% of the company’s total assets of $5billion. Looking to the rest of the year, Mr Beddow said that "consensus earnings forecasts for the current financial year continue to be revised lower, now at -5% compared to the previous year".
"While these lower forecasts are largely attributed to weaker earnings in the Resources and Energy sectors, Telecommunications is the only sector which has seen positive earnings revisions over the past few months," Mr Beddow said.
"With dividend payout ratios at high levels, it is likely that dividend growth will be subdued for the coming year. Consensus earnings per share growth forecasts for the following two years are currently at +7% and +9% respectively.
"With the next corporate reporting season beginning and our cash at modest levels, we are likely to be patient with further meaningful investments, unless we see further market weakness or opportunities through reporting season. However, in a continued low interest rate environment, we believe the overall yield available in the Australian equity market remains attractive,” Mr Beddow added.
