and 12 months on:
- Djerriwarrh seeks to provide shareholders with a total return comprising an enhanced level of fully franked income that is higher than is available from the S&P/ASX200 together with long term capital growth, delivered at a low cost. The enhanced yield is achieved through a bias to investing in companies with higher dividend income, produced over the short and long term, as well as using option strategies to generate additional income.
- The interim dividend has been increased to 6.75 cents per share fully franked, up 28.6% from 5.25 cents per share fully franked for the corresponding period last year. The increase was as a result of higher company dividends and improved income from option activities. None of the interim dividend is sourced from taxable capital gains, on which the Company has paid or will pay tax.
- At 31 December 2021, the yield on the portfolio (net asset backing) was 5.6%.
- A key feature of the improved performance of the portfolio and generation of option income has been the management of the option positions through the half.
- In the period we were exercised on a number of companies held in the portfolio because of share price strength. This included ASX, Macquarie Group, Carsales.com, Telstra, Woolworths, Sydney Airport and Goodman Group. In some cases, we were able to replace our holdings by subsequently buying back in at lower share prices, for example Macquarie Group. For the other companies listed above we are left with lower holdings although we may look to rebuild these positions over time when suitable opportunities arise.
We were also active sellers of our remaining holdings in APA Group, Alumina, Orica and Origin Energy, and we reduced our positions in companies such as Brambles and Woodside Petroleum.
- Some of the capital realised from these sales was re-allocated into a number of other companies. This is a continuation of our portfolio strategy where we aim to maintain a diversified portfolio of high quality companies that can deliver Djerriwarrh the appropriate balance between income and growth.
As a result, we added to a number of our key portfolio holdings at prices where we saw long term value. These major purchases included BHP, Wesfarmers, Coles, Commonwealth Bank, Westpac, Ramsay Health Care, Auckland Airport, Equity Trustees and CSL. We also actively added four new companies to the portfolio. JB Hi-Fi and SCA Property Group were purchased primarily for their attractive dividend yields. Cochlear and Domino’s Pizza were purchased for their attractive long term growth profile.
Call option coverage at the beginning of the period was 39%, which was maintained through July and August. After the market (as measured by the S&P/ASX 200 Index) fell from its mid-August high, our option positions profited as we made the decision to close out a significant number of these positions that were due to expire over September to December. Call options in companies such as ANZ, CSL, Commonwealth Bank, Transurban, Westpac, JB Hi-Fi, Netwealth and Woolworths were closed out with share prices lower on average, which enabled us to retain significant option income. As a result, we ended the year with lower than usual call option coverage in this group of companies.
During November and December, we started increasing our option coverage in selected companies including BHP, Rio Tinto, ASX, AUB Group, SCA Property Group and BWP Trust. In contrast we decided not to have any call option coverage in companies such as Cochlear, Domino’s Pizza Enterprises, Auckland Airport and Pinnacle Investment Management as we perceive these companies to have relatively more attractive capital growth potential.
Overall, call option coverage of the portfolio at calendar year end was 28%, slightly lower than our normal range of 30% to 40%.
In addition to our call option writing activities, we generated additional income through writing put options in companies including Coles, CSL, Woolworths and Transurban.
In terms of our overall option strategy to generate additional income, our goal remains to write specific single stock options against companies held in the portfolio, rather than setting an overall target for option coverage for the portfolio. This is done in order for Djerriwarrh to meet its enhanced yield objective, but only to a level where long term capital growth is not overly compromised.