Dividends Under Threat, Says Argo

The Age

Tuesday October 28, 2008

CHRIS MILNE

DESPITE falling interest rates and Government moves to stimulate the economy, Australian company profits will remain under growing pressure while dividend payments are under threat, Argo Investments directors say.

The listed investment company's managing director, Rob Patterson, said companies would find it increasingly difficult to maintain revenues and dividend payouts in a slowing economy.

Speaking after Argo's packed annual meeting in Adelaide, Mr Patterson said Australian company income streams were a serious concern as the effects of the market meltdown filtered into the real economy.

However, despite the "extremely bearish" market sentiment and prospects of a tough year ahead, Argo - with $220 million in cash reserves - was cautiously evaluating investment opportunities.

"Undoubtedly, there are bargains," he said.

Mr Patterson told shareholders the company had spent $80 million since its June 30 balance date, adding to its holdings in Alumina, Commonwealth Bank, Orica and Rio Tinto, and last Friday had bought more BHP Billiton at $24 a share, which Argo believed was "a very good price".

Chairman Chris Harris said it was difficult to make investment decisions after the meltdown in overseas credit markets, as earnings and valuation fundamentals were being overwhelmed by market events and volatility continued unabated.

However, Argo saw "some cause for cautious optimism". Although growth in emerging economies was moderating, industrialisation and growth in China and India remained solid and Australia would benefit from its trading partnerships in Asia.

Argo, with cash reserves - which were boosted by raising another $52 million from shareholders last month - and no debt, was well prepared to capitalise on market opportunities as they arose.

Mr Patterson said cash had become Argo largest asset as share values slumped in recent months.

He said Argo was satisfied with its $215 million stake in BHP Billiton, $140 million stake in Milton Corporation and $139million stake in Macquarie Bank, originally bought at $3.80 a share and which had paid Argo $77 million in dividends.

Mr Patterson described Telstra as "pretty solid", while Woolworths was performing well, Westpac was "the best of the Aussie banks" and Woodside Petroleum had a strong future outlook despite the fall in the oil price.

Meanwhile, he said, Argo had suspended securities lending and had no exposure to the practice. In the past, it had declined to lend shares when it believed they would be used for "the inappropriate action of short-selling".

Securities lending added only $300,000 to pre-tax profit last financial year, when operating profit rose 23% to $182 million, and the bottom line jumped from $171.5 million to $294 million on net realised capital gains.

Babcock & Brown and GPT director Ian Martin apologised yesterday for the poor performance of the two companies, which have slumped on the sharemarket under the impact of heavy debt levels.

Mr Martin said he was "unhappy and regretful" over the performances of the two companies.

Directors were working hard to turn things around at the investment group and the property trust, after the finance and property sectors were caught in the epicentre of the global financial crisis.

Mr Martin, who was re-elected as a director of Argo Investments, said the insights gained from the experience of Babcock & Brown and GPT would be valuable for his contribution to the Argo board deliberations.

© 2008 The Age

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