Welcome to the second LIC review in the series.
This time, we’re running the ruler over Argo Investments, another large investment company listed on the Aussie sharemarket.
Last time we took a look at Australian Foundation Investment Company (AFIC). For those who missed it, you can find that review here.
New readers may be wondering why I like LICs so much. For an overview, check out my article – LICs vs Index Funds.
Again, I’ll just point out my bias from the start – we’re owners of Argo and plan to be for a very long time. So with that out of the way, let’s get started…
Argo Investments (ARG)
Argo was established over 70 years ago, back in 1946.
Today, they’re the second biggest LIC listed on the ASX, just behind AFIC. Argo manages a diversified portfolio of equities that now exceeds $5 billion in value.
Safe to say, these guys have been around the block once or twice. And they’ve captained the Argo ship through some choppy waters over the years.
Their aim is to hold, and add to, a portfolio of high quality companies to provide attractive returns for shareholders over time.
Argo holds shares in around 100 different Australian companies and trusts, which it receives dividends and distributions from.
They’re a very long term focused investor and will hold shares patiently for many decades.
Philosophy & Objectives
Here’s their stated goal from their website:
Argo’s objective is to maximise long-term returns to shareholders through a balance of capital and dividend growth. It does this by investing in a diversified Australian equities portfolio which is actively managed in a low cost structure in a tax-aware manner.
They place a strong emphasis on providing a relatively stable and growing fully franked dividend to shareholders.
Therefore, Argo invests for the long term in a big basket of companies it expects to provide increasing dividends over many years.
The company adds to their favoured holdings when the stocks appear to be good value and are trading at attractive prices, in respect to their long term outlook.
Argo holds a large portfolio of shares, around 100 companies in total.
Similar to AFIC and the other old LICs, the portfolio is heavily weighted to the largest companies on the ASX.
Here is a breakdown of the portfolio by sector:
So that makes for a pretty picture as far as I’m concerned!
Overall, I like the sector breakdown of Argo more than AFIC. There is less weighting to materials (often meaning resources) which tend to be less reliable dividend payers.
Often there is still some investments made in the largest resource companies because they do offer dividends, and can at times be very profitable.
It’s good to see some diversification away from the big banks, which dominate the index. While the banks are strong dividend payers, it’s better to be less reliant on any one industry for income.
Also their top 20 holdings only make up around 58% of the portfolio, which is more diversified than some other large LICs.
You can check out Argo’s top 20 holdings here.
The portfolio will change slowly over time. But not much. Argo will mostly keep adding to it’s portfolio of stocks when it sees opportunities.
As with AFIC, the portfolio is similar to the index. But it’s does differ in places.
Most of the older LICs tend to invest less in the property and resource sectors, given their poor long term performance. Sharemarket educator Peter Thornhill highlights this well in his teachings. You can see it clearly in this article he wrote.
Anyway, it’s the overall approach of Argo that I’m most interested in. That is, investing for a growing stream of dividends.
While it’s a fine place for long term savings, an Aussie index fund has no such goal. It will just replicate the largest 200-300 companies at any time, regardless of whether they pay dividends or not.
Since we’re taking the dividend investing approach, Argo is a better fit for us.
Over the last 10 years, Argo has performed roughly in line with the market.
The portfolio return has been 4.2% per annum. The return from the S&P ASX 200 has been 4.1% per annum.
Both including dividends. But not including franking. And not including fees or tax for the index.
Not exactly the most accurate comparison. The index doesn’t pay tax and fees haven’t been deducted, as would be the case for an index fund investor.
Since there was no capital growth over that period, the return was essentially all dividends. So let’s look at a more accurate picture of what the end investor would have received over that time.
Argo’s dividends are fully franked, which takes the return from 4.2% per annum, to 6% per annum.
The index’s dividends mostly come with 80% franking credits, taking the 4.1% return up to 5.5% per annum. After deducting fees for the index fund over that time, which were a bit higher than today, say 0.2% – we end up with a return of roughly 5.3% per annum.
I’m not saying this to try and show Argo is superior.
Simply, this is the most accurate way I know of for comparing returns. After fees and costs, with franking included. That’s what management can control and shows the true performance of any manager or index, from the shareholders end.
Wait…5-6%? What? Why bother?
The last 10 years have been rough for Aussie shares. I discussed this a little in my review of AFIC.
Basically, it’s because the GFC was roughly 10 years ago exactly. So our 10 year returns include that 50% share price decline right at the very start! Very misleading!
By looking at Argo’s Annual Report, we can get a better picture of what proper long-term returns look like.
Over the last 15 years, it shows net portfolio return (including dividends), was 8.4% per annum.
Including franking, it’s 10.2% per annum.
Remember, we’re not trying to beat the index. Sure, it’s nice if it happens. But personally, that’s not our goal.
What we really want in early retirement, is a strong and steadily growing passive income stream!
Of all the performance figures, this one is perhaps the most important.
As early retirees, we need our dividend income stream to keep pace with inflation over the long term, if we’re to rely on it. So let’s see how this LIC has fared.
Over the last 20 years, Argo have grown their dividends to shareholders from 13 cents per-share in 1997, to 31 cents per-share in 2017. Dividend history can be found on their website here.
Here their dividend history in chart form…
We can see the huge increase before the GFC was a little out of the ordinary. In fact, dividends went up almost 70% in just 4 years! That’s quite extreme.
Since then, dividends were reduced to more normal levels and then resumed their steady march upwards, in line with the long term trend.
Anyway, those figures give us a dividend growth rate of 4.4% per annum, for the last 20 years.
During that time, inflation has been 2.5% per annum, according to this RBA inflation calculator. (I had to use 1996-2016, as the data doesn’t include 2017 figures yet)
As we can see, Argo has managed to deliver an income stream to shareholders that comfortably grew faster than inflation. Hopefully, the next 20-50 years look very similar!
This isn’t a magic trick.
Profitable dividend-paying companies usually manage to increase their earnings faster than inflation, over the long term. By increasing prices, reducing costs and creating new products or services.
And from these growing earnings, they pay increasing dividends to shareholders as well.
So from Argo’s big basket of stocks, I think we can expect, on average, to receive a steadily growing income stream into the future.
Argo has one of the lowest fees around.
The company has a current management expense ratio (MER) of 0.16%.
They are internally managed, so there’s no fees going to an outside manager. Their expenses are mainly staff, administration costs and office rent.
Also, there is no performance fees.
And since their costs are largely fixed, as the portfolio gets bigger, the expense ratio gets lower.
Essentially, this is as cheap as it gets. It’s around the same cost as an index fund. But for our money, we get a large portfolio of dividend-paying stocks, managed with a long term focus on providing a reliable and increasing fully-franked dividend.
What I Like
I like Argo’s very long and fruitful history. Also, their patient and conservative investment approach.
Their portfolio is slightly more diversified than the other old LICs, which I view as a plus. This means their dividends are coming from a more even spread of sectors.
As an LIC, Argo has the ability to retain profits to smooth out dividends over time. This helps during downturns when many companies reduce dividends. Often, LICs will only need to reduce dividends by a smaller amount, or sometimes not at all.
Most importantly, I like the emphasis they place on investing for dividend growth. Obviously, they’ve done a good job at harnessing this strategy. And, they have a very decent track record of paying increasing dividends to shareholders to show for it.
The low fee is a winner too.
Because they’ve been around for so long, they’ve gone through a few portfolio managers. This is actually a good thing. It shows that the company relies on their philosophy and investment process, rather than a hot-shot stock-picker.
Occasionally Argo will offer a Share Purchase Plan (SPP) to shareholders. Basically, it’s an offer to buy more shares of the company free of brokerage and often at a small discount to the current price. They do this to raise cash to increase their investment portfolio, in a cost effective and shareholder-friendly way.
Due to the small discount and no brokerage, it’s a great way to increase your holding. They usually offer a Dividend Reinvestment Plan (DRP) at a small discount too.
Also, Argo is a qualified Listed Investment Company in the eyes of the ATO. This means they can pass on the CGT tax deduction if they sell any shares in their long term holdings. So on the odd occasion, we’ll receive a tax deduction attached to our dividend, along with those franking credits. More info can be found here.
Overall, I like the steady and predictable nature of Argo. And their main goal closely aligns with ours. In fact, it’s the same!
What I Don’t Like
While I could point out their recent performance as a negative point, I won’t.
Truthfully, it doesn’t really bother me. For various reasons, Argo will underperform the market for certain periods. Sometimes it might be ages.
Usually, its got to do with which stocks are in favour on the market. Since Argo has an income focus, they often miss all the excitement and steer clear of hot sectors and high-flying stocks.
Instead, they stick to the companies and sectors which are likely to provide reliable earnings and dividends.
Similar to AFIC, their portfolio size could become an issue. It’s harder for them to invest much in small companies. In other words, Argo has too much money! While it’s still possible, it does make it harder.
And given their long term ownership of some stocks, there would likely be a large tax bill triggered if they sold. There’s a chance this makes them hold on to companies with less-than-bright futures for too long.
Overall, I’m a big fan of Argo.
It’s one of the lowest cost ways to get access to a large portfolio of Australian shares.
I can appreciate they’re similar to the index. But with their dividend growth focus and the predictable growing income stream they provide, this is what I prefer.
With a portfolio of around 100 companies, those dividends are coming from a good spread of different businesses and sectors.
Argo has been getting it done for over 70 years. And I’m betting they’ll be around for a long time to come!
Personally, I feel comfortable having an increasing part of our net worth invested in Argo for the very long term.
Currently, it’s on a dividend yield of 3.7%. And a gross yield (including franking) of 5.3%. That’s lower than it has been in recent times. But still much better than most other assets at the moment.
Last year, I was buying a few parcels of Argo shares for our own portfolio. And this year I’ll be buying a few more!
Despite the price being higher and the dividend yield lower, I’m happy to keep accumulating shares for the long-term income stream.
Summing up – Argo is a low cost, diversified and income-focused investment company. And I think it’s a perfect fit for an early retirement investment portfolio!
You can find our more on their website – www.argoinvestments.com.au
If you want to nerd out, here’s a research report about Argo you can take a look at – Argo Investments 2017