Market conditions are volatile, and we expect them to remain so for a while. The Djerriwarrh portfolio continues to focus on high-quality stocks that produce an enhanced income stream for our shareholders, a strategy that is particularly suitable during times of uncertainty.
At our recent shareholder meetings in March, we discussed the current economic environment and market outlook, our approach to investing, our dividend, and stocks that feature in Djerriwarrh’s income-focused portfolio.
Here we share our views on the common themes that shareholders had questions about.
Inflationary challenges for the market
Rising inflation has meant an adjustment in the share prices of many companies as interest rates have been lifted to try to dampen growth. But there are signs that inflation may be at or near its peak. We have started to see freight rates ease and some downward movement in the oil price. However, core inflation remains elevated at this point meaning the rising interest rate cycle still may not be over.
Interest rates are returning to what is historically normal and economic activity has so far been resilient in this environment, but consumer sentiment surveys are weaker.
As a result, market conditions are volatile, with new challenges rising frequently, and we believe this will be the environment for some time. Following a very strong performance, since February, energy stocks have fallen quite substantially. In addition, banks have been affected by concern over two bank closures in the US, and technology and real estate stocks have been weak as a result of rising interest rates.
The recent company reporting season showed that earnings have been moderate, but the next 12 months are likely to be challenging.
Companies have elevated levels of inventory and are finding it harder to put up their prices to cover increased costs due to softer consumer demand. It means a period of heightened earnings risk, but it will sort out the weaker business models from the stronger ones.
While we can’t predict markets, we do focus on quality stocks and buy them when we see value.
What characteristics do high-quality companies have?
At Djerriwarrh, we seek to invest in companies that show attributes such as effective management with a strong track record, unique assets, an industry leadership position, consistent earnings, and growth opportunities. We look for strong balance sheets and avoid companies with high levels of debt.
We believe these attributes drive a competitive advantage and better opportunities for growth, and lead to a high return on capital and greater market share. They enhance the company’s leadership position and, in combination, this delivers long-term value to our shareholders which includes dividends.
Macquarie: An example of a high-quality stock
Constructing a diversified portfolio of high-quality companies across different sectors and with an appropriate balance of income and growth is the key for Djerriwarrh to deliver on its investment objectives in various market conditions.
Macquarie Group is a good example of the high-quality stocks in the Djerriwarrh portfolio and is a key holding. Macquarie is perhaps best known for its capital management and banking and financial services divisions, but its biggest divisions are commodities and global markets, and asset management. The biggest regional contributor to group profit is the Americas, followed by Australia.
Macquarie is now a leader in commodities trading in North America after building the various businesses for more than 20 years and is a leader particularly in the gas market, and its scale and expertise in this area is very hard to replicate. This makes the company uniquely positioned to capitalise on growth in this market, and it’s been a terrific contributor to group profits over the last few years.
Macquarie also operates the second largest port in the US, the Maher Asset Terminals in New York. It’s an incredible asset in terms of location – 50 million people located within a 200-mile radius of the port – and pricing power. Recent sales of other ports in the area suggest that Maher Asset Terminals has a value of $5-6 billion – it was originally purchased by Macquarie for $650 million. Macquarie has great management, a strong balance sheet, excellent long-term growth opportunities and provides a nice mix of income and growth for the portfolio.
Our dividend is very sustainable
Key objectives of the Djerriwarrh portfolio are to provide our shareholders with an enhanced level of dividends compared to the broader share market and provide a good total return over time through dividend growth and capital growth.
The decision to rebase Djerriwarrh’s dividend from the 2019 financial year and during the 2020 financial year was difficult, but we believe the dividend is now more sustainable as we are now basing the dividend on net operating profit per share rather than also paying out large amounts of realised capital gains.
The benefit is that the realised capital gains are retained in the portfolio and start earning income, which generates more income and growth over the long term which will be a key driver of future growth.
The dividend grew strongly in the 2021-22 financial year and while one year’s performance does not constitute a trend, we are very confident of the direction of the dividend.