Is the Argo share price a buy?

I think it’s worth considering whether the Argo Investments Limited (ASX: ARG) share price is a buy.

Over the past year the Argo share price has fallen nearly 7%. I am always open to investing in quality shares if they are trading at better value.

Argo is one of the oldest and biggest listed investment companies (LICs) on the ASX. It was established in 1946 and now has a market capitalisation of around $5.4 billion, which makes it one of the largest 100 listed companies.

The job of a LIC is simply to invest in other shares on behalf of shareholders. Argo looks to generate long-term returns for shareholders, providing a mix of capital and dividend growth.

Argo is different to many other LICs in that it’s internally managed, meaning it doesn’t charge fees to shareholders and that results in low operating costs. In FY18 its total operating costs were only 0.15% of average assets at market value. This is attractive because lower costs mean higher net returns for investors.

Another reason to like Argo is the stability of its dividend, it has paid a dividend every year since inception. It wasn’t able to maintain its dividend during the GFC like some other old LICs, but a reasonaly small reduction was probably the sensible thing to do.

Many of Argo’s top holdings are very recognisable including Westpac Banking Corp (ASX: WBC), BHP Group Ltd (ASX: BHP), Macquarie Group Ltd (ASX: MQG) and Australia and New Zealand Banking Group (ASX: ANZ).

Interestingly, it also holds two old LICs as part of its top 20 holdings, being Australian United Investment Company Ltd (ASX: AUI) and Milton Corporation Limited (ASX: MLT).

The problem for Argo is that its top holdings, which are mostly Australia’s largest blue chips, haven’t been performing very well lately. For example, the big banks are suffering because of a falling housing market and the Royal Commission. A LIC can only perform as well as its investments.

Foolish takeaway

Argo currently offers a grossed-up dividend yield of 5.9%. Whilst it has been a dependable source of income, it’s currently trading at a 4.6% premium to the NTA declared at the end of December 2018. Therefore, it might be a better investment idea to simply invest in the Vanguard Australian Share ETF (ASX: VAS).

However, I believe ASX investors can do better than the index by focusing on individual growth shares for the long-term.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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