Transcription of The Stock Network Interview with Argo Investments (ASX:ARG), Managing Director Jason Beddow
Lel Smits: As artificial intelligence reshapes investment markets, the value of human judgment experience and active management remains critical. Argo Investments, one of Australia’s oldest listed investment companies, is navigating this challenging environment while maintaining its focus on delivering sustainable income and long-term value for shareholders.
Ahead of presenting at the Australian Shareholders Association’s Investor Summit, Future Fortune’s Human Edge, Investing in the Age of AI, I’m joined by Argo Investments Managing Director, Jason Beddoe, to discuss finding income in a concentrated Australian market, Argo’s move to quarterly dividends and dividend guidance, and also the differences between listed investment companies and ETFs.
Jason, welcome to The Stock Network.
Jason Beddow: Thank you for having me.
Lel Smits: Now, Australia’s share market is highly concentrated, particularly among the major banks and resources companies.
Can you explain to me how Argo approaches finding sustainable income and long-term opportunities within this environment?
Jason Beddow: Sure. Look, I guess it’s a core part of what we do. We’re always trying to grow the capital base of Argo, because we do believe if you don’t grow your capital, you’re not going to grow your dividend.
But as you point out, the resources and banks make up circa 55% to 60% of the market. And like we say, clearly we invest in these sectors. I guess when we think about the market, we’re looking for stocks that are paying good dividends now, but really importantly, who’s going to be growing their dividends? So some of the stocks, for example, a stock like Technology One, now you wouldn’t associate that with a yield stock, but it’s actually grown its dividend about 15% per year for the last decade.
And we think it’ll continue to grow. So we want some stocks like that in the portfolio as well that are providing that dividend growth as well. If you look at the banks, the yields are quite good, maybe ex-CBA, it’s very expensive, but the deals haven’t grown a lot.
And equally, your resources can be a little bit of a sucker punch. Last time commodity prices were very high back in 2022, the big miners were paying humongous dividends. I think we received 40 million dollars in BHP in one year.
Over the subsequent three years following that, that halved as commodity prices fell and their capital expenditure went up. So you do need to be cautious on resources. Look, it does vary a little bit.
I mean, Australia with the franking credit system imputation, companies do tend to pay out reasonable payouts. We do have one of the highest payout markets globally. So there’s a good base level of franking, I guess, and income you can generate.
But look, it is really mixed. And if you go back over time, even a company like Woolworths, while it would appear to be very stable, it has cut its dividend from time to time. So we spend a lot of time bottom up.
We don’t think it’s particularly well analysed dividend paying. We think most of the market is really, I guess, not obsessed, but really focused on capital growth and what share price is going up and probably less interested about the dividend sustainability. So we spend a lot of time on cash flows, franking balances.
But we’ve found some of the smaller companies, you know, that have got good balance sheets and good businesses, throw off a lot of cash. It can be a good supplement to some of those big caps. Yes.
Lel Smits: And look, when it comes to your quarterly dividends and dividend guidance, Sago has just moved to paying dividends quarterly and also provided shareholders with this dividend guidance. Can you outline what drove these changes and also what they mean for investors that are seeking reliable and sustainable income?
Jason Beddow: Yeah, look, we’ve been thinking about it for probably a couple of years and twofold. Clearly there’s an appetite from a certain cohort of investors for regular income.
There’s been a lot of income products come to market. They’re not all equities. There’s private credit and private debt and other things.
But those that are paying a regular dividend, more regularly than, I guess, twice a year, like a corporate, seem to be in favour of investors, seem to be trading better. We’re still not an income fund. We’re not going to more regular.
And then it much more aligns with, I guess, ETFs, who have become quite a formidable part of the market for investors. Advisors use them because they’re easy. And, you know, relatively low cost.
So it aligns with an ETF. So if a new investor was, I guess, potentially looking at something like Argo or an ETF, there’s no differentiation, which is good. Equally, I just think the modern world has become a bit more contemporary with regular cash flow management, whether it be a buy now pay later, paying your bills or rates monthly or quarterly.
So we think it aligns quite nicely. The other thing with our own cash flows, but there is almost four reporting seasons in Australia. So we currently just finished one with August with the junior end companies.
So they’re all paying their dividends, I guess, through the end of September, October. The banks and a bunch of other companies, they are September year ends. So they are paying dividends towards the end of the year in December or early January.
So there’s actually four reasonable times for us through the year where we’re receiving income. So we think that actually will manage our cash flow a little better internally as well. So we think it’s a win for shareholders and giving guidance.
If we look at our portfolio, we look at the dividend capacity of the cranky and we have the confidence to come out and say, look, we can pay 40 cents next year. And it’s a nice round number, the 10 cents a quarter as a starting point for quarterlies. And we hope that will sort of continue to grow over time.
Lel Smits: Absolutely. It is a very nice round number. And look, Jason, you also mentioned ETFs.
And of course, we’ve got continued growth of ETFs, as you also reference. But how do you think investors should think about the differences between listed investment companies and passive investment products? And also, where can active management, do you think, deliver an advantage?
Jason Beddow: Yeah, I think the core difference really is the structure of that. Argo or a listed investment company is a company and pays corporate tax.
So, okay, that is cash flow going out to the ATO, but equally generating our own frank credits on the back of that. An ETF is a trust and has to pay out, I guess, its earnings for the year, which is a mix of frank dividend, unfrank dividend, excuse me, some capital. It’s a real mix, really.
And you don’t know what you’re getting until the end of the year when you get your annual statement. And often that’s taxable. So we think the post-tax return of the ETF is not quite as good as the headline.
Whereas in an investment like Argo, we pay fully frank dividends. And we have since began. And if you don’t sell your Argo shares, you have no other capital gains to pay.
So you’re receiving fully frank income with no other tax obligations. So on a post-tax basis, the difference between the returns, if only we were to do the index, would be superior. And then on the back of that, yeah, we’ve had a really good period since COVID.
Yeah, there’s been a pretty tough time for managers if you follow other LICs or some of the more higher profile managed funds. But we’re really happy that we’re ahead of the market on one, three, five and seven years, which we think considering what’s happened in the world over that period of time and a portfolio with pretty low turnover is outstanding. And there’s probably only two or three funds in the country with those sort of numbers.
So I think there’s a perception that the old LICs are a bit boring and a bit conservative, and we certainly are, that we can actually generate returns above the market. And like last year, for example, FY26 was a good year. We’re at two and a half percent or more above the market.
But in real terms, that’s created over $200 million extra value within the structure for shareholders that will earn income or can be put to other investments. So we think particularly something like Argo, which is internal, is a big differentiator as well. Then, as I say, the cost to run Argo is 0.14%, which is not really a lot different to an index ETF, particularly when you consider the franking difference alone is probably worth 40 or 50 basis points, half a percent a year.
So while they might be 0.005% cheaper, you’re way better ahead. I mean, some of the externally managed LICs are a bit different. They have quite big fees, some of them, high-performance fees.
So you’ve got to be careful, I guess, when you’re looking at things as an investor. It’s not always apples with apples. But I think being able to predict that, as you say, we’ll pay $0.10 quarterly dividends next year, an ETF can’t do that.
I mean, they are at the whim of the market. Whatever the market yield is, is what they’ll pay out. And whatever the franking level of the market is, is what they’ll pay out.
So it is very much a passive investment. Yes. And look, Jason, finally, you are presenting at Australian Shareholders Association Conference with an AI theme.
And AI is, of course, becoming increasingly influential in investment research, also decision-making. I’m interested to hear from you what aspects you think of investing can’t be replaced by technology, and particularly when it comes to things like face-to-face meetings, experience, and human judgment. We’d like to think that they’re still important.
Like, clearly, this industry has a lot of information and data, whether that be from industries, from companies, from brokers, there is just so much information. So we’re using AI internally as almost like a research assistant, as junior analysts. So you can quickly get a report written on something, you can aggregate lots of information.
What I guess AI, we don’t think, can do yet is interpret and make decisions based on that. And that can be something as simple as who owns a particular stock? Are they a seller or a buyer? What will be happening in the market? Does this company have a short position? Does it have a long position? And so we’ve just had one-on-ones with about 80 companies after reporting season. We get to sit, which is a great part of the role, sit down with CEOs and senior executives from these companies and talk through their strategy and what they’re doing.
And I guess so we can think, well, we’d like this business on a two to five-year view. We think the strategy’s sound. We think this is happening.
But they’ve got to invest for the next six to 12 months. So maybe the market’s not going to like that. So from a momentum or more quantitative sort of money flow, it may not look very attractive.
There’s always been quant funds, trading and high-frequency trading. That’s just getting accelerated with AI. So we can take a different view.
And if we’re right, we might have to wait a year or two, but we can probably buy some of these stocks much cheaper when they’re out of favour. For the upside, we think it’s coming on a two or three-year plan, which is very hard to interpret, I think. As an AI bot now, I think it’ll get better.
But we’ve tried picking stocks and it hasn’t had a great track record to date. So we think we’ve still got our jobs for a little bit longer.
Lel Smits: Absolutely. I’m sure you do. Thank you for the update from Argo Investments and look forward to hearing more at the Australian Shareholders Association Investor Summit this month.
Jason Beddow: Yeah, we’re looking forward to it.
Ends