The Net Operating Result for the half year was $21.9 million, 2.6% up from $21.3 million in the previous corresponding period. This is the figure Directors have considered when setting the dividend. It excludes the impact of unrealised open option positions and is considered a better measure of the Company's income from its investment activities.
Income from investments increased to $19.5 million, up from $18.5 million in the corresponding period last year. Option activity also contributed positively, with option income rising to $9.4 million, compared to $8.4 million in the same period last year.
Dividends held steady
We kept our interim dividend steady at 7.25 cents per share, fully franked.
Dividend income was up during the period because of increased holdings across several companies such as Telstra Group, Macquarie Group and Woodside Energy Group and in particular the major banks. The Commonwealth Bank of Australia and Westpac Banking Corporation also increased their dividends through the half year. Djerriwarrh also received a special dividend because of Newmont Corporation’s takeover of Newcrest Mining during the half year. These contributions help offset the decline in the dividend received from BHP over the period, which was expected.
Based on the interim dividend declared and final dividends paid, the dividend yield on the current net asset backing is 4.5%, and 6.4% grossed up for franking credits (if fully utilised). This enhanced yield is 1.4 percentage points higher than what the S&P/ASX 200 Index offers.
Strategic call option activity helped navigate low equity market volatility
The financial year began with call option coverage of 32%, towards the bottom end of our normal range of 30% to 40%. We then increased the portfolio’s call option coverage taking it to 37% by the end of August as the S&P/ASX 200 Index rose. The subsequent fall in the overall market from the start of September to the end of October enabled us to capture a significant amount of call option income. In the majority of cases we chose not to re-write call options at this point given the value we saw in the market, with many share prices having returned to very attractive levels. As a result, call option coverage at the end of October fell to 28.5%. Around this time, we took the opportunity to write put options in a number of our portfolio holdings given our view on quality and value, including companies such as CSL and Telstra.
The portfolio’s positioning at the end of October, particularly the lower-than-average call option coverage and the put option positions, proved highly beneficial as the market ran strongly into the end of calendar year 2023. As a result, the portfolio benefited from the 12% rise in the S&P/ASX 200 Index over November and December, while also allowing us to capture a significant amount of option income.
We used the market’s strong performance to subsequently increase call option coverage to 39% by the end of December.
A portion of our holdings in a number of companies were sold as a result of call option exercises on strong share prices. Companies including James Hardie Industries, CAR Group, BHP, Commonwealth Bank, and National Australia Bank were part of these sales. Importantly, the decision was made not to repurchase these stocks in the majority of cases.
We actively sold small holdings in IAG and AMP, reinvesting capital in what we consider quality companies trading at attractive prices.
Our largest purchase was Telstra Group, driven by its sustainable earnings and dividend growth strategy, as well as its share price value during the period. We also augmented positions in Woodside Energy Group, Macquarie Group, Transurban, ASX, and CSL at attractive prices.
Two new holdings, Newmont Corporation and Mineral Resources, were added during the period, with Newmont added as a result of the takeover of Newcrest Mining in October 2023. We purchased Newcrest before finalisation, benefiting from a large special dividend.
This aligns with our strategy to maintain a diverse portfolio of quality companies for the right balance between income and growth.
Strong portfolio performance ahead of the benchmark
Our total portfolio return for the half-year was 9.3 per cent, surpassing the benchmark index’s return of 8.3 per cent, both including franking. National Australia Bank, BHP, Commonwealth Bank, Wesfarmers and JB Hi-Fi were big contributors to our portfolio performance.
For the year to 31 December 2023, total portfolio return including franking was 17.6 per cent, surpassing the benchmark’s return of 14.0 per cent including franking. Our relative performance over this period was driven by the strong share price increase of holdings such as JB Hi-Fi, James Hardie Industries, CAR Group, Reece Limited and ARB Corporation. Another factor that positively impacted our relative performance was our underweight position in mid-sized resource companies, particularly in the lithium sector.
Going into 2024, we observe that despite concerns about inflation, interest rates, and geopolitical conflicts, the S&P/ASX 200 Index closed at record highs in 2023. However, we hold the view that the market is fully valued against long-term averages.
Our call option coverage for 2024 is at 39 per cent, nearing the upper limit of our range. We hold no put option positions and lower net debt compared to six months ago.
Our positive outlook for Option Income includes a substantial amount already booked for the second half of 2024, thanks to the high call option coverage. Market performance has placed a manageable portion of our call option exposure 'in the money,' spread across various stocks and maturity dates.
In terms of Dividend Income, market expectations for the S&P/ASX 200 Index in 2024 anticipate overall flat to slightly lower dividends. This is influenced by reduced payouts from major resource companies such as BHP, Rio Tinto, and Woodside Energy Group, offset by solid dividend levels from banks, infrastructure, and real estate firms in November and December 2023.
Despite short-term uncertainties in economies and financial markets, we believe that owning a diversified portfolio of quality companies positions Djerriwarrh well for enhanced yield and long-term capital growth.