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Is the Argo Investments Limited (ASX:ARG) share price a buy?

There are few companies on the ASX that are older than Argo Investments Limited (ASX: ARG). It was established in 1946 and has been investing in Australian shares ever since. Its portfolio is worth around $5.7 billion and has over 85,000 shareholders on its register.

It’s a listed investment company (LIC) that invests in ASX-listed shares and hopes to deliver long-term capital growth and dividend growth for its shareholders.

Argo once had Sir Donald Bradman as its Chairman, which speaks of the investment philosophy and strategy that Argo is following.

It’s worth asking if it’s a buy or not:

Buy

The LIC just reported that its NTA was $8.06 at the end of September 2018, yet its share price finished at $7.94. This means it’s trading at a slight discount to its NTA. Buying things at a discount is usually a good idea.

It has a very low operating cost. To achieve pleasing returns reducing your costs can be one of the best ways to improve your net returns. Argo’s total operating costs were 0.15% of average assets for FY18.

Argo currently has a grossed-up dividend yield of 5.7% and it has been a very consistent dividend payer.

Not a buy

Argo’s returns have beaten cash returns in recent history, but they haven’t been great either. Over the past five years its average total shareholder return has been 6.1% per annum. There are several other funds and LICs that have generated much better returns than this in the past five years.

Its returns are driven by its underlying investments. Its top investments are mostly similar to the ASX Index. Some of its top holdings include Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), BHP Billiton Limited (ASX: BHP) and Wesfarmers Ltd (ASX: WES).

I don’t believe the above businesses will generate strong growth in the coming years ahead. One or two of the holdings might, such as CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG), but not the majority, which is likely to be a drag on total returns.

Foolish takeaway

Ultimately, I think Argo will pay a decent level of income over time. However, I don’t think it’s a buy for any investor except retirees looking for a secure form of dividend income.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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