Djerriwarrh has lifted its half-year profit and its interim dividend as we look to provide shareholders with an enhanced level of fully franked income that’s higher than is available from the S&P/ASX200 index.
Djerriwarrh’s profit for the half-year to 31 December 2022 was $21.7 million, up 10.3% from $19.6 million a year earlier.
The result was driven by income from investments of $18.5 million, up from $15.1 million in the prior corresponding period; and income from option activity of $8.4 million, up from $7.9 million a year earlier. We use option strategies (covered call options and put options) to produce an enhanced yield for our shareholders.
Our net operating result for the half-year, which excludes the impact of open option positions and is a better measure of our income from investment activities, was $21.3 million, up from $18.1 million in the prior corresponding period. The operating result primarily comprises dividends received from the investment portfolio (long-term holdings), option income, and revenue from our trading portfolio (short-term holdings).
Our dividends continue to rise
In line with our objective of providing our shareholders with an enhanced income stream, our interim dividend to shareholders rose 7.4% to 7.25 cents per share fully franked, compared to 6.75 cents fully franked a year ago. It was also higher than the final dividend of 7.0 cents per share fully franked in 2021/22. Higher company dividends received and continued strong income from options activity enabled us to increase our dividend.
The addition of JB Hi-Fi to our portfolio in the previous calendar year and increased holdings in BHP, Wesfarmers, Region Group (formerly SCA Property Group), Mirvac, Macquarie Group, and Coles generated improved dividend income. Also, companies such as Transurban, Woodside Energy, Mainfreight and Westpac paid out higher dividends compared to the prior corresponding period.
Based on the interim dividend declared and final dividend paid, the dividend yield on the current net asset backing is 4.7%, and 6.7% grossed up for franking credits. Based on the net asset backing and including franking, this represents an enhanced yield of 1.1 percentage points higher than that available from the S&P/ASX 200 index.
Relative portfolio performance affected by lower share prices, underweight positions
Our total portfolio return for the half-year was 6.2 per cent including franking compared to the benchmark index’s return of 10.8 per cent, including franking. BHP, Westpac, Commonwealth Bank, Wesfarmers, and CSL were significant contributors to our portfolio performance.
For the year to 31 December 2022, our total portfolio return including franking credits was negative 7.0% compared to the benchmark’s positive return of 0.5% including franking. Our relative performance over this period was driven by lower share prices for companies such as James Hardie Industries, ARB Corporation, Reece and Mainfreight. Up until last year, these holdings had very strong share price performances. Another factor that impacted our relative performance was our underweight position in resources and energy stocks.
Options activity produced profits
Despite a low level of market volatility for much of the half-year, option income lifted by 7.0%. We started the financial year with a lower call option coverage of 26%, which enabled us to benefit from a subsequent market rise when we wrote call options against Commonwealth Bank, Goodman Group, National Australia Bank, Westpac, BWP Trust, Mainfreight, and REA Group. A sharp market fall in September gave us the opportunity to close out the options for a profit. During this period, we wrote put options against Region Property Group, Transurban, Goodman Group, Coles, and Macquarie Group. Subsequent share price strength in many of these companies allowed us to close out most put positions at a profit.
We increased our call option coverage to 40% during the market’s strong performance over October to early December. This resulted in option exercises in BHP, Commonwealth Bank, National Australia Bank, and Westpac at the end of the calendar year. We finished the year with call option coverage of 35%.
The outlook for company dividends over the next six months is largely positive.
Dividends from big miners BHP and Rio Tinto will largely depend on iron ore prices. We expect iron ore prices and dividends from BHP and Rio Tinto to normalise from financial year 2023 onwards but there is potential for variability. China’s ability to remain open amid the continuing presence of COVID-19, and the performance of the Chinese property market, are factors to consider.
Another determinant of dividend levels will be the profitability of the banks. The big four banks emerged from calendar year 2022 in good shape, with strong capital positions and healthy bad debt provisions. However, this could change if the rising cost of living and higher interest rates negatively impact Australian households.
Inflation remains a key focus, but the market appears to believe that inflation has peaked or is near to it and that the worst of interest rates rises is behind us. We believe this may be too optimistic.
Consequently, we have entered the 2023 calendar year with relatively high call option coverage of 35%, minimal put option positions, and lower net debt.
Although the future direction of economies and financial markets is uncertain, we believe our diversified portfolio of high-quality companies can produce an attractive level of income and capital growth over the long term, in line with our investment objective of providing our shareholders with enhanced yields.