Argo Investments 2018-19 results were similar to many of its rivals in the Listed Investment Company (LIC) space, or those more traditional with big holdings in old-line stocks like the big miners such as BHP and Rio Tinto and the spin-off of Coles from Wesfarmers late in 2018.
The cash distributions by both giant miners in 2018-19 via special dividends, higher ordinary payout or buyouts showered billions of dollars of cash on shareholders and Argo, like rivals AFIC and Milton, were there to catch some of it – in fact, a lot of it judging their solid returns.
But that said Argo, like its rivals, is now very cautious about the coming year and in reality not really optimistic about another cash shower like the ones they enjoyed in the year to June.
That’s why Argo shares at $8.31 hardly moved in the wake of the release of the annual result. They seem fully priced for what is an increasingly gloomy outlook with trouble in Hong Kong, Trumps’ trade war, a stagnating economy here and in much of Europe, and a slowing pace of activity in the US.
Falling bond yields tell us investors are fearful of the outlook and that they are increasingly worried there is either a global slump about to happen, a major clash between superpowers, or slowdowns in China, the US (Australia) and instability in Europe that will combine to crunch demand.
So Argo’s full-year result (like that from Milton and AFIC) looks more like an example of making money while the cash fell from the blue chips.
Income from operating activities was up 31.5% to $315.2 million and profit up 33.7% to $292.7 million.
But the caution in the outlook came in the striking of the final dividend of 17 cents a share on top of an interim of 16 cents. That made 33 cents for the year in total, up 4.7% from the 31.5 cents a share in 2017-18.
While it was the 7th successive lift in dividend from Argo, the more modest rise in payout compared to earnings and after-tax profit shows the caution of the board.
Argo explained that the large increases in income and profits were boosted significantly by a “one-off, non-cash income item of $36.1 million” that resulted from the demerger of Coles by Wesfarmers that occurred in November 2018.
Excluding this ‘one-off’, Argo’s profit was $256.6 million, up to a still-solid 17.2% on the previous full-year result.
Argo’s dividend income was boosted by a number of special dividends – notably from BHP, Rio Tinto Ltd and Wesfarmers. Many ASX companies paid out irregularly large dividends prior to the Federal Election in May in anticipation of an expected Labor victory and implementation of franking credit reforms.
For the June year, Argo added $343 million of ‘long-term investments’ – notably more Transurban Group, Bega Cheese, Boral, Oil Search and a first stake in James Hardie. Major disposals included Rio Tinto, BHP, Coca Cola Amatil, Incitec Pivot, Milton Corp and Asaleo Care.
Despite the cash and solid returns, Argo underperformed the wider market because of it like so many old lines LICs was short of exposure to tech stocks like Appen, WiseTech, and Afterpay.
Argo’s investment (NTA) performance was +7.3% after all costs and tax, compared with the ASX 200 Accumulation Index which returned +11.6% without any allowance for costs or tax.
And looking to 2019-20 Argo said, like AFIC and Milton, that it has concerns about current valuations (even though the market is off 4 to 5% from the ASX 200’s high on July 30 of 6,845).
Argo said “valuation ratios of listed companies look to be close to the upper end of historic ranges” and the company is expecting “ongoing downward pressure on corporate earnings”, which may lead to increased volatility during the remainder of the year but could also “create buying opportunities to further build our long-term investment portfolio.”
So there is a lot of cash on hand, but hesitation to buy. Cash on hand doubled to $219 million at June 30 from $108 million the year before