Djerriwarrh Maintains Strong Performance and Increased Dividends

The financial year ending 30 June 2024 presented a complex environment with market fluctuations driven by inflation concerns, direction of interest rates, and geopolitical tensions. However, our long-term investment philosophy based on building a portfolio of quality companies that can produce good returns over our long-term investment horizon allowed us to navigate these conditions effectively, and deliver an enhanced fully franked dividend yield to shareholders which is one the key investment objectives of the fund. We outline Djerriwarrh’s results for the year ended 30 June 2024 in this article.

The final dividend to 8.0 cents per share, up from 7.75 cents fully franked last year. This brings the total dividends for the year to 15.25 cents per share, an increase from 15.0 cents last year.

One of our primary objectives is to deliver a dividend yield that is ahead of the dividend yield of the market. Our dividend yield for the reporting period, including franking on the net asset backing was 6.5%, which is 1.8 percentage points higher than that available from the S&P/ASX 200 Index.

Our net operating result for the period was $40.3 million, an increase from $39.0 million last year. Net operating result per share is up to 15.4 cents from 15.2 cents.

Option income which is a key part of providing an enhanced income increased 12% to $16.6 million for the financial year. This was a very pleasing result, especially given the portfolio’s average call option coverage for the financial year was 34%, slightly below the mid-point of our target range of 30% to 40%. This meant that we generated a significant amount of option income while still benefiting from the majority of the capital growth produced by the market.

Dividend income increased marginally to $36.3 million up from $35.6 million in the previous financial year.

Portfolio Performance

Our portfolio delivered a total return of 13.6%, including franking credits, compared to the S&P/ASX 200 Accumulation Index return of 13.5%, including franking credits. This performance is attributed to our investment approach. We are aiming to own what we think are the highest quality companies and have the right balance between income and growth in the portfolio with good diversification across stocks and sectors.

Our management expense ratio remained low at 0.42%, demonstrating our commitment to cost-effective portfolio management.

In FY24, we actively managed our portfolio, focusing on strategic adjustments and prudent decision-making. This approach allowed us to capitalise on market opportunities, realise gains, and seek better relative value.

Our largest acquisition for the year was Telstra Group. Market concerns over Telstra’s pricing power in mobile plans led to a share price decline, allowing us to significantly increase our holding at very attractive prices. We also substantially boosted our position in Woodside Energy, taking advantage of share price weakness. This investment provides us with exposure to a globally unique portfolio of high-quality LNG and oil assets, which underpin strong cash flows and fully franked dividends.

We also increased our holding in Woolworths, despite the intense regulatory scrutiny the company faced throughout the financial year. While this challenge persists, we believe the significant drop in Woolworths’ share price overlooked the defensive nature of the company’s earnings, its superior store network, and its leading online offering.

In the financial year, a portion of our holdings in several companies were sold because of call option exercises driven by share price strength. Key exercises were across major banks - National Australia Bank, Westpac, and Commonwealth Bank of Australia - and consumer discretionary companies JB Hi-Fi and Wesfarmers. We were also active sellers of our small remaining holdings in James Hardie Industries, Temple & Webster, IAG, and AMP.

During this period, we added three new holdings: Newmont Corporation, Mineral Resources, and IDP Education.

Our position in Newmont arose from its takeover of Newcrest Mining in October 2023. We purchased Newcrest before the deal was completed, allowing us to benefit from the large special dividend paid to Newcrest shareholders as part of the takeover.

Mineral Resources, a diversified mining company with significant exposure to lithium, iron ore, energy, and mining services, also joined our portfolio. We have high regard for their management team and trust them to deliver strong earnings growth.

IDP Education, the leading global provider of English language testing and student placements to tertiary institutions, was another addition. We are drawn to the company’s long-term earnings growth potential, given the substantial opportunity to gain market share in large addressable markets.

FY25 Market Outlook

The market currently appears moderately expensive, particularly when compared to key long-term valuation metrics such as price to earnings, price to book, and dividend yield.

Entering this financial year, we maintain a net cash position while also holding high call option coverage on some companies that have continued to outperform strongly.

Regarding dividend and option income, our recent investments in high-yielding stocks such as Telstra, Transurban, Woodside, and BHP should assist with dividend income. Higher positions in these companies should somewhat offset the lower dividend income expected from holding less of companies like CBA, NAB, Westpac, Wesfarmers, and JB Hi-Fi. Our net cash position provides us with flexibility to reinvest in high-yielding companies when we see value.

The current positioning of our options book also allows us to generate further option income over the year without sacrificing potential capital growth. More importantly, we remain confident in our long-term investment strategy. Owning a diversified portfolio of high-quality companies with the right mix of income and growth will enable us to achieve our long-term objectives.

With our current portfolio settings, particularly a sustainable dividend payout ratio, we aim to generate an effective level of enhanced yield while delivering growth in both capital and dividends over the long term.