Ferret's Stock to Watch: ARGO INVESTMENTS LTD 08:00, Wednesday, February 07, 2007
AN INVESTMENT STRATEGY FOR THE LONG HAUL
Sydney - Wednesday - February 7: (RWE Aust Business News) *********************************************************
OVERVIEW ********
Long-term share investment companies often show an amazing accumulation of wealth.
One company that has attracted attention this week has been Argo Investments (ASX:ARG) which has been building up its share portfolio for 46 years.
With such a long-term time frame the highs and lows are often smoothed out.
Argo's diversified portfolio of quality Australian shares produced a total portfolio return of 19.1 per cent for the year to June 30.
However, it lagged a little against the gains in the ASX All Ordinaries Accumulation Index of 24.5 per cent.
This was due to the very strong performance of energy and natural resource companies, a part of the market which is extremely volatile and where Argo traditionally had a below-market weight exposure.
Since balance date Argo has spent about $72 million on investment purchases, the larger ones being in BHP Billiton, Rio Tinto, Woodside Petroleum, Alumina, Toll Holdings and Woolworths.
Investments which were taken over during the year were Foodland Associated and Patrick Corporation.
GPT Split Trust income securities and Woolworths income securities were redeemed and holdings of Pacifica Group, Pacific Brands and a number of other smaller holdings were sold.
Since balance date Excel Coal, Gasnet Australia Group and Unitab were taken over and the company is considering takeover offers for Adsteam Marine, Chiquita Brands South Pacific and DCA Group.
Its holding in Mayne Pharma has been sold.
Net asset backing has appreciated significantly.
Led by the resource sector, Australian equity markets continued to rally during the year under review and as a result, the net tangible asset backing per share, before providing for deferred capital gains tax on unrealised gains within the investment portfolio and based on market value, rose to $6.81 at June 30 compared with $5.93 for the previous year.
Total dividends distributed to shareholders amounted to $115.1 million, an increase of 18.2 per cent on the previous year's distribution of $97.4 million.
On Monday, directors resolved to make a 1-for-8 renounceable rights issue of about 61,231,480 fully paid ordinary shares in the company to be offered to existing shareholders at $7.20 per share.
Shareholder approval is not required.
Following the issue, there will be 552,611,657 shares on issue.
The issue is priced at a substantial discount of 16.9 per cent on the closing price for Argo shares last Friday, which was the last trading day prior to the date of the announcement.
The new issue will be available to registered holders of ordinary shares at the close of business on February 16.
The shares will trade ex-rights on February 12 and rights trading will commence on that date.
The issue will not be underwritten.
If the issue is fully subscribed, the company will raise approximately $440.9 million. These additional funds will enable the company to make new investments, and to increase existing investments, as favourable opportunities arise.
The new shares will participate in the final dividend for the year ending June 30, which is expected to be paid in September.
Directors expect the final dividend to be at least 13c per share, fully franked, on the increased share capital resulting from the issue.
Shareholders with a registered address outside Australia and New Zealand are not eligible to participate in the issue.
SHARE PRICE MOVEMENTS *********************
Shares of Argo Investments yesterday rose 28cc to $8.96. Rolling high for the year is $9.20 and low $6.65. Dividend is 25c to yield 2.75 per cent. Earnings per share is 43.1c and p/e ratio 20.79. The company has 488.6 million shares on issue with a market cap of $4.3 billion.
Argo shareholders have done well in the latest financial year.
They have received another increase in their interim dividend following a continuation of the company's record-breaking profit growth in the opening half of 2006-2007.
Operating profit after tax and before realised gains on the sale of long-term investments advanced by 18.6 per cent to a record $70.1 million in the half-year to December 31 from $59.1 million in the previous corresponding period.
Operating earnings per share rose 14.3 per cent from 12.6c to 14.4c per share, excluding realised gains on the sale of long-term investments.
Interim dividend has been increased to 12c per share fully franked compared with 11c in the previous first half and 10c per share paid for the opening six months of 2004-2005.
The latest profit improvement continues Argo's strong earnings growth which included the company's 2005-2006 full year operating result jumping 17.2 per cent to a record $123.1 million and annual dividend rising from 21c to 24c per share.
The latest first-half operating profit does not include $62.5 million (previous corresponding period $9.8 million) in net realised gains on the sale of long-term investments after tax.
A number of these transactions are non-cash, scrip based, deemed sales which are eligible for roll-over relief for income tax purposes.
These include large portions of the holdings in Alinta, Australian Gas Light Company and Brambles Industries.
While these gains are required to be included in the company's reported profit under accounting standards, Argo identifies them separately and not as part of operating profit.
Including these gains, the latest December-half profit has risen from $68.9 million to $132.6 million.
Argo's managing director, Rob Patterson, said that the latest first-half result continued the recent trend of strong distribution growth from many of the 180 stocks held in the company's diverse investment portfolio and reflected Australia's very strong economy.
"The outlook remains positive for the current corporate reporting season and all of the signs are for another generally buoyant period of healthy returns from many of the stocks in which Argo holds investments," Mr Patterson said.
The higher fully franked 12c per share interim dividend takes Argo into its 61st consecutive year of paying dividends.
The total amount of the latest interim distribution is up from $52.3 million to $58.8 million - easily a record first-half payment.
The increased dividend will be paid to Argo shareholders on March 9.
Mr Patterson said significant investment purchases made by Argo in the half year to December were BHP Billiton ($26.8 million), Telstra Corporation (including instalment receipts) ($22.8 million), Rio Tinto ($15.1 million) and Woodside Petroleum ($14.9 million).
There were no major sales, apart from the deemed sales referred to earlier.
The company's net tangible asset backing per share rose to a record $7.56 as at December 31, compared with $6.81 on June 30.
Mr Patterson said Argo's objective is to maximize long-term, secure returns to shareholders through a balance of capital and dividend growth from its diversified portfolio of Australian stocks.
"For the past 10 years, the company's investment portfolio has produced a compound annual return of 14.9 per cent, as measured by the movement in net asset backing per share plus dividends paid, compared with 13.1 per cent from the ASX All Ordinaries Accumulation Index," he said.
This included a total return of 20.5 per cent from the portfolio in the 2006 calendar year.
Chris Harris, Argo's chairman, said Argo's diverse and high quality investment portfolio was well placed to continue producing income growth.
"We are also confident of our astute investment team maintaining a watchful eye on market trends and emerging opportunities, in particular those that may arise from any downturn in the current record share market environment," he said.
BACKGROUND **********
Argo's investment approach can be summed up in three words - safe, steady and simple.
Rather than attempt to gain spectacular rewards in the short term from high-risk situations, the investment company aims to provide you with safe and steady progress, secured by a spread of investments over a wide range of industries.
Diversified of the portfolio is as follows: other financial 28 per cent, banks 16 per cent, materials 13 per cent, industrials 11 per cent, consumer discretionary 8 per cent, cash assets 8 per cent, consumer staples 5 per cent, telecommunication services & IT 4 per cent, energy 3 per cent, utilities 2 per cent and health care 2 per cent.
Argo adopts a long-term investment philosophy in selecting its portfolio, which also includes smaller companies with high-quality management and the potential for strong earnings growth.
Its investment team has an excellent track record in selecting quality smaller stocks which can provide strong returns as they grow into larger companies or are absorbed by bigger competitors.
No management fees are charged by Argo and being a listed company, only normal stockbroker charges apply when shares are purchased and sold.
For the year to June 2005, total operating costs were 0.15 per cent of total assets at market value.
Argo pays dividends in March and September each year.
Imputation credits on dividends received by Argo are passed on through the fully franked dividends paid to Argo shareholders, with all shareholders benefiting from the associated tax credits.
Certain Australian shareholders can also claim a tax benefit where the dividend is sourced from a LIC capital gain.
Argo has a share purchase plan which enables shareholders to invest up to $5,000 a year in additional shares, currently at a 2.5 per cent discount off the market price.
Participation in the SPP is entirely at the option of the shareholders and no transactional costs apply.
The company has a dividend reinvestment plan, which is currently offered to eligible shareholders at a 2.5 per cent discount off the market price.
Participation in the DRP is again entirely optional and no transactional costs will apply.
Argo also has a history of making attractively priced new issues of shares to existing shareholders.
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