Argo Investments Limited (ASX: ARG) has just reported its FY21 half-year result. Are Argo shares a good long-term buy?
Argo is a listed investment company (LIC). The job of a LIC is to invest in other businesses on behalf of shareholders and generate investment returns.
Argo reported that its profit fell by 43.3% to $67.4 million and profit / earnings per share (EPS) declined by 44% to 9.3 cents.
The LIC explained that in response to the ongoing COVID-19 pandemic, Australian companies generally maintained a cautious approach to declaring dividends. Numerous companies in the portfolio substantially cut or cancelled their dividend payouts, which significantly impacted Argo’s half-year profit.
Argo’s board decided to declare an interim dividend of 14 cents per share, a decrease of 12.5%. The company explained that a key benefit of Argo’s LIC structure is that it has the ability to draw down on reserves of retained earnings and franking credits. This enables Argo to cushion the impact of fluctuations in dividend income through the economic cycle, allowing for a more sustainable dividend flow to shareholders.
Argo said that its investment performance, being its net tangible assets (NTA) return after all costs and tax, was up 12.3% over the six months. Some of the new investments that it made during the period included Aurizon Holdings Ltd (ASX: AZJ) and Newcrest Mining Limited (ASX: NCM). It sold out of its AMP Limited (ASX: AMP) position.
Is Argo a good a long term buy?
In terms of the company’s outlook, it’s optimistic for the year ahead with Australia doing better than many other countries.
Argo said it has a diversified portfolio of quality shares, no debt and a strong balance sheet.
COVID-19 was clearly going to hurt the Argo performance because many businesses have cut dividends so heavily, such as the big four banks, transportation infrastructure and so on.
I think there is a place for LICs like Argo in a retirement portfolio if the focus is almost entirely on income. But it’s better to buy Argo shares at a discount to the NTA – when the share price is lower than the underlying value of the portfolio.