LIC Milton Provides Stern Warning On “Elevated” Valuations

By Glenn Dyer | More Articles by Glenn Dyer

In comments all investors should note, the CEO of one of the country’s biggest listed investment companies (LIC) has warned that his group is not upbeat on prospects for the 2019-20 financial year, with bank earnings a special concern.

In comments issued with the record result for 2018-19 and record dividend payout for the 12 months, Milton Corp, CEO, Brendan O’Dea warned that market values are high at the moment compared to past levels and he wonders how long this can be maintained.

He said in the statement that “Valuations in the Australian market are elevated, compared to historical averages, as declining interest rates encourage investors to chase equity yield.”

“Company earnings growth has been strong in 2019, particularly in the resources sector, due to high commodity prices.

Milton forecasts company earnings growth to slow in 2020, providing a more challenging environment for dividend growth in our portfolio.

“We are particularly cautious about bank earnings and dividends with pressure on margins due to lower interest rates and higher compliance costs.

That’s an interesting voicing of concern for the most important sector in the market.

Like most LIC’s, Milton is heavily exposed to the banks. Around 30% of its $3.2 billion Australian equities portfolio is invested in the four major banks, as well as the smaller Macquarie, Bank of Queensland and Bendigo and Adelaide.

That’s close to $1 billion, with Westpac and the Commonwealth the top two holdings (worth more than $600 million combined).

It will be interesting to see if that view is supported tomorrow when the biggest LIC, Australian Foundation Investment Co (AFIC) releases its 2018-19 results.

Like Milton (and Argo which reports next month) AFIC also has a large exposure to the banks.

Mr. O’Dea said that “Milton retains considerable financial flexibility with cash of $110 million and no debt. We are in a sound position to continue to invest when opportunities arise.

Milton Corporation said on Friday it will pay a higher dividend for 2018-19 after revealing record earnings for the year to June.
Milton reported a 13.6% increase in net after-tax profit for the year ended 30 June of $147.7 million.

Milton said underlying profit, which excludes special dividends received rose by a more sedate 3.7% to $133.6 million.

Milton will pay a higher fully franked final dividend of 10.4 cents a share taking the total ordinary dividend for the year to 19.4 cents a share up 2.1% on 2018.

On top of that, the second half saw Milton shareholders paid a special dividend to shareholders of 2.5 cents a share. That took the total payout for the year to shareholders of a record 21.9 cents a share, up 15.3% on 2018.

Milton shares rose 0.4% to $4.85 on Friday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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