Thank you all for standing by, and welcome to the Djerriwarrh Investments Half-Year Financial Results Briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a phone question at that time, you'll need to press star one on your telephone. I'd now like to hand the conference over to Mr. Mark Freeman. Thank you. Please go ahead.
Well, good afternoon, everyone. I'm Mark Freeman, the CEO and Managing Director of Djerriwarrh Investments Limited. Welcome to this interim result briefing. I have joining me today on the webinar, Brett McNeill, Portfolio Manager from the investment team, Olga Kosciuczyk from the investment team, Andrew Porter, our CFO, Matthew Rowe, our Company Secretary, and Geoff Driver, our General Manager of Business Development. Before we start the presentation, a bit of housekeeping on the webinar. This briefing is based on the material available on the company's website. If you're using your computer to access the presentation via the webcast, the slides will change automatically. If you are accessing by phone only, the PDF of the slides with page numbers is available on the website. Finally, please note, following the presentation, there will be time for questions and answers.
You can ask a question either via the webcast or through the operator. I will now turn to chart two, which has the disclaimer. On the presentation, page two, this is just a disclaimer to say we're here to talk about what we're doing in the company. We're not here to give opinions and views and advice. On slide three, the agenda, I'll give a brief overview of the objectives. Then I'll pass over to Andrew Porter, who will talk about the half year in summary. Brett and Olga will then talk about the results and portfolio. Finally, Brett will give some outlook comments, and then we'll move over to questions. If you move to slide five, an overview. Djerriwarrh is one of the largest income-focused listed investment companies or LICs, as we call them.
Djerriwarrh listed on the ASX in 1989, and shareholders get the benefit of full transparency associated with being a listed investment company, as well as the governance standards delivered by our independent board of directors. Djerriwarrh shareholders own the management rights of the company, so there's no fee leakage to a third party, and there are no performance fees. Finally, Djerriwarrh is part of the broader group of LICs, which include the Australian Foundation Investment Company, or AFIC, AMCIL and Mirrabooka. This supports a broader research approach and scale of operations. Moving on to slide six, the investment objectives. Djerriwarrh primarily seeks to provide enhanced level of fully franked income to our shareholders. That income is higher than what would be available on the index or the S&P/ASX 200, and this is delivered to shareholders at a low cost.
Djerriwarrh also aims to provide shareholders with attractive investment returns through access to fully franked dividends as well as growth in capital invested. The chart on the left shows what the grossed up yield has been on Djerriwarrh, which has been 5.6% compared to the index, 3.8%. This highlights the enhanced income you receive from Djerriwarrh when you include the benefits of franking.
The franking credits are a very important part of the return to our shareholders. On the right, you can see the portfolio performance. It was a very good six months and one year. The portfolio total return was ahead of the index when you include franking. And then five-year, ten-year, a little bit below the market, but those market levels were very strong. 15-year about in line with the market. We're trying to give sound total returns, but shareholders receive a much higher dividend yield than the market. With that, I'll pass over to our CFO, Andrew Porter.
Thank you, Mark, and good afternoon, everybody. We're on slide eight and wouldn't mind people to press the play button in the bottom left-hand corner if it appears to be stuck. I'll apologize in advance for the photograph that those of you who are on the webcast can see. The profit for the half year, the headline profit there is AUD 19.6 million. Now, that's up 142%. That's because that includes the open option positions, which the accounting standards say we have to include. Those are the options that haven't expired and we haven't sold out yet. It does move around. In fact, its variability is one of the reasons we don't concentrate on it, because those options have not yet contributed to what our dividend paying amount is.
I've just seen that the photo is still of Mark, so I apologize for apologizing for Mark. What we tend to focus on is the net operating result for the half year, which is AUD 18.1 million. There you go, that's a shock. It was up 54.4%. Brett will go into more detail on what the components of that are later on. The franked dividend has been increased. It was AUD 0.0525 this time last year, up to AUD 0.0575 at the final, and that's now been increased to AUD 0.0675 with this interim result that'll be paid in February. The portfolio dividend yield, Mark has discussed and gone through, but of course, we're happy to take any questions on that later.
MER has increased this year up to 0.4%. This is largely due to the fact that the associated entity, AICS, had a much lower profit this year. There's a timing issue in that. I would note that the full year MERs are normally about 0.45%, 0.43%. Depending on how the portfolio itself moves, I wouldn't expect us at the end of the year to be radically different. But of course, I do stress that will largely depend on how the portfolio itself moves and how the market moves. The portfolio return of 6.7% with 4.6%, this is an accumulation return, so that includes those dividends reinvested, and Mark's already been through that. Let me now pass over for more detail and more of the interesting stuff to Brett. Thanks, Brett.
Thanks, Andrew, and good afternoon, everyone. Looking now at our profit result in some more detail. On slide 10, we give a simplified presentation of our profit and loss statement in order to better understand the key drivers of Djerriwarrh's profit result. The focus here is on our net operating result, which, as Andrew said, is the better measure, we believe, of Djerriwarrh's income. The two key drivers of our net operating result are firstly, the dividend and distribution income that we receive from our investment portfolio holdings, and secondly, the option income that we earn from our option strategies. As we can see in the table on slide 10, dividend and distribution income was up 57% versus the first half of financial year 2021, and option income was up 29%.
This led to our operating income increasing 46% to AUD 22.8 million after including some small other income items. Moving down the profit and loss statement, we see that the combined finance and administration costs were up modestly by 6% to AUD 2.4 million, and income tax expense was up 40% to AUD 2.3 million. This produced a net operating result of AUD 18.1 million, which as Andrew noted, was up 54% versus the prior corresponding period. On a per-share basis, the net operating result was up 47% to AUD 0.0768, with a dividend declared of AUD 0.0675, up 29% and more than covered by operating profit per share. Hopefully, this gives a clearer understanding of the key drivers of Djerriwarrh's profit result for the half.
The next part of our presentation analyzes, in a bit more detail, the performance of our two key income items, being dividend and distribution income and option income. Looking firstly at dividend and distribution income on slide 11. The left-hand chart on slide 11 shows how this item has tracked over the last 5 first half periods. As we can see, this result was up strongly, up 57% versus the prior period. We note it is still below the levels from first half 2018 to first half 2020. There's a number of moving parts here, and the next two slides will hopefully give some further detail on this.
Before we go into that, the right-hand chart on slide 11 shows our AUD 15.1 million of dividend and distribution income represented as a yield based on our investment portfolio value, which is shown as the blue line, and it's compared to the dividend yield of the market as represented by the ASX 200 shown in the green line. As we can see, the dividend income yield from our portfolio has typically been around or slightly above the dividend yield of the market over the last 5 first half periods. We'd expect this relationship to be broadly the same in future periods. To give some more context on the level of dividend income we received this half versus prior periods, we have now prepared some charts looking at the same metric but for individual stocks.
For this part, we've chosen four large companies across different sectors, and they are all large holdings in the Djerriwarrh investment portfolio. Note that the time periods here line up with Djerriwarrh's reporting periods, so they are consistent with the timing of the dividend income charts that we just talked through. Starting with Westpac on the left-hand chart of slide 12. We can see the strong recovery in Westpac's dividend this half, doubling from the COVID-impacted result of AUD 0.30 to AUD 0.60.
This was despite a poor profit result in the most recent period. If Westpac can go closer to delivering on their stated targets, then we would expect further dividend growth to follow from here. Even if this occurs, we don't expect to return anytime soon to the dividend levels for first half 2018 to first half 2019. Mainly because Westpac, like the other major banks, are now running lower and more sustainable dividend payout ratios than was the case 4-5 years ago.
Clearly, BHP has been a big contributor to Djerriwarrh's increased dividend income. The right-hand chart on slide 12 shows the huge increase in BHP's most recent dividend, largely driven by record-high iron ore prices during the period. While the short-term outlook for BHP is positive, we don't expect this amount of dividend per share to be maintained over the medium and long term. We are very conscious about not making our portfolio overly reliant on BHP and the resources sector in general for future dividend income.
The left-hand chart of slide 13 shows Transurban, the blue-chip toll road company, whose dividends remain at depressed levels as a result of the Sydney and Melbourne lockdowns over the last 2 years. We think Transurban remains very well positioned to recover traffic volumes and hence profitability and dividends in coming years as economies eventually return to more normal activity levels. Lastly, CSL on the right-hand chart of slide 13. CSL's dividend growth has been steady over the last 5 years, making it one of the few companies to continue delivering dividend growth over this time period. Turning now to the second key driver of our net operating result, being option income.
The left-hand chart on slide 14 shows our option income over the last 5 first half periods. The first half 2022 result of AUD 7.9 million of option income was especially pleasing. As the chart shows, it is the highest result over the last five first half reporting periods, and it's very strongly measured on a yield basis, which is how we've shown it on the right-hand chart of slide 14. Hopefully, this discussion has given some more detail and insight into Djerriwarrh's profit result, especially in the important areas of dividend and distribution income and option income. I'll now pass to Olga to give an update on our portfolio, looking at both the options book and our investment portfolio.
Thank you, Brett, and good afternoon, everyone. On slide 16, we show the performance of the market in the first half of the financial year 2022, overlaid with the top-down view of our portfolio's call option coverage. We write call options against selected portfolio holdings and manage these positions daily based on our view of the company's quality and valuation, and also in response to market conditions.
The market was very strong between July and August 2021, and as such, we were gradually increasing our portfolio call option coverage to 39%. This was mostly driven by increased coverage in banks and selected industrial companies. In September and October, resources companies weighed on the index as iron ore prices halved. We used this weakness to our advantage and closed out a number of our call option positions to lock in profits.
Most notably, we decreased our coverage in resources companies from over 50% to zero. This positioned our portfolio well for the subsequent recovery in BHP and Rio Tinto's share prices. In November and December, we saw the market being volatile but largely flat. We wrote call options in selected companies, but to preserve potential capital growth, we kept portfolio call option coverage relatively low at around 31%. On slide 17, we show a snapshot of some of our major recent transactions. On the left side, we show the key sales, which include both active selling as well as option exercises. During the first half, we exited our entire holdings in ATA, Alumina, Orica, and Origin Energy, as the long-term prospects for these companies become increasingly challenging. We also reduced our positions in Woodside Petroleum and Brambles.
Key option exercises in ASX, Macquarie Group, carsales.com, Telstra, and Woolworths have led to reduced holdings in these companies. We have been selectively buying these holdings back when opportunities presented themselves. We redistributed this freed-up capital from our sales to the companies on the right side of the slide. This included adding four new companies to the portfolio. JB Hi-Fi is a high-quality retailer with a well-regarded brand, strong network footprint, and excellent supplier partnerships. The company's strong balance sheet and cash generation underpin an above-market dividend yield, which is fully franked. SCA Property Group is a property trust that owns neighborhood shopping centers. The property portfolio is high quality, with the majority of its rent coming from Coles and Woolworths. The company has a solid balance sheet and an attractive dividend yield.
Domino's Pizza is the largest master franchisee for the Domino's Pizza brand in the world, with over 3,000 stores across 10 markets. The company has a strong track record of growing earnings and delivering excellent shareholder returns. We are confident that the growth runway for the company remains long as they continue to innovate their menu, invest in technology, and roll out new stores across Europe, Asia, and Australia. We also initiated a position in Cochlear, a global leader in implantable hearing solutions. The company generates excellent shareholder returns and earnings growth, which we think can be sustained for years to come as they continue to invest in R&D. Their market penetration is still very low, given hearing loss is significantly under-treated. We've also been adding to a number of our existing holdings, including BHP, Wesfarmers, Coles, CBA and Westpac, which further enhance the dividend yield of our portfolio.
We are confident that the overall impact of this transaction is a higher level of quality across our portfolio and a better mix of income and growth. On slide 18, we give an overview of some of our key holdings in the portfolio. As always, the key focus for us is to construct a diversified portfolio of high quality companies with the appropriate balance of income and growth, so we can deliver on our investment objectives over the long term. We own a good mix of large companies that have above average dividend yields and solid long-term growth prospects. We also own a number of large companies that have excellent long-term growth prospects, but below average dividend yields.
These companies include CSL, Cochlear, Mainfreight, ASX, Woolworths, carsales.com, ResMed and Goodman Group. We also have a place in the portfolio for smaller, high quality companies of the future that have big potential to generate growth for years to come. These companies include Equity Trustees, Netwealth, Temple & Webster, FINEOS, ARB, PEXA and Pinnacle. With that, I will now pass back to Brett.
Thanks, Olga. On slide 20, we provide our main thoughts on the outlook. Starting with the all-important topic of dividend income. Overall, we are positive for the next half year period based on our analysis of the outlook statements, balance sheets and dividend payout ratios of the companies held in our investment portfolio. In terms of specific sectors, the iron ore price will be a key determinant of profits and dividends for the major miners, like we spoke about earlier in relation to BHP's dividends. In the case of the banks, bad debt levels, along with costs and interest margins, are key influencers on their profitability and dividends. We note that their strong capital positions are a major positive at this point in time.
In terms of our option income, the very strong result we had in this period is expected to normalize from here, but as always, our option income results are highly influenced by market volatility levels and timing. In terms of markets and economies, inflation and interest rates are two of the dominant issues globally. Equity markets have clearly benefited from lower interest rates since the aftermath of the 2008 credit crisis, so the prospect of higher interest rates is a concern for future market performance. On this, real estate and infrastructure are two sectors to keep an eye on given their traditional role as interest rate sensitive sectors. We note that other sectors such as technology and a number of other growth stocks are also vulnerable to higher interest rate levels.
Whatever happens though, we can't control the ups and downs of the share market, and so the most important thing for us is to have a clear strategy and to stick to it. Therefore, the key focus for us is to continue owning a diversified portfolio of high quality companies that can produce an attractive level of income and growth over the long term. With the current portfolio settings, we believe this will enable Djerriwarrh to achieve its long-term objectives. That concludes the formal part of the presentation. I'll now hand back to Geoff Driver to conduct the question and answer session.
Thanks, Brett. Just as a reminder, the questions can be asked via the app or the web, or through the operator pressing star one. Operator, do we have any questions via the phone at this point in time? Just confirming, operator, do we have any questions via the phone?
My apologies. We have no questions at this time.
Right. Okay. There's one question here. With the recent market moves, how do you think Djerriwarrh's positioned in terms of what's the volatility in the market at the moment?
Yeah, yeah, good, really. We've been using the sell-off in the last few weeks to add to a number of our preferred companies, and it's really on the theme of what Olga was talking about we've been exercised on some stocks, which has led to lower holdings, and we've wanted to buy back into a number of those companies. The sell-off in the last few weeks has given us the opportunity to do that with particular reference to Woolworths, and also recently carsales.com as well, and a number of other stocks. We've also been adding to companies like James Hardie, Auckland Airport and Wesfarmers. That's on the stock side.
On the option side, having high coverage in a number of the names, the companies that have sold off, has given us the opportunities to close out those positions early and book some really good profits, which sets us up well, we think, for the second half.
Okay, thanks, Brett. Got a question here about APA. What were the reasons behind selling APA?
Sure. I can start off with that one. APA is a really good quality company, and it's been a great performer over the long term. We think the industry is a bit challenged, though, in terms of their ownership of gas pipelines. The network of gas pipelines that they own is a fantastic network. Clearly, there are competitive issues and particularly around ESG with the gas sector.
We just don't think that the returns over the long term will be as good as what we've seen in the past. We've been exercised on some stock, and we took the opportunity to sell the remainder of that holding and reinvest it in what we think are some better quality companies with better long-term income and growth prospects. They were some of the buying that I already talked through in the presentation.
Okay. Thanks, Brett. Interesting question. We've had this question before, actually. Given Djerriwarrh was an income-focused investment company, how did the two largest holdings, namely BHP and CSL, work towards achieving this outcome?
I can start off there. I think it highlights the importance of having a diversified portfolio. You never want a portfolio like this to be a one-trick pony or to be too skewed towards one part of the market. We want a number of different exposures across sectors, but also the income and growth characteristics deliver a mix of returns, income and growth, overall at the portfolio level. You look at those two stocks. I mean, BHP is where we've concentrated our resources exposure, so we've tended to concentrate in the large cap blue chip mining companies rather than maybe some smaller, riskier players. It's been terrific lately, not just from a dividend income perspective, but for option income as well. BHP is a large contributor to our option income we got booked in the period.
We've also b enefited from writing the options and buying the stock at what turned out to be good points in the cycle. That's been really good in the mix. Of course, as we mentioned in the portfolio, we never want the portfolio to be overly reliant on that. You know, history of investing in resources companies would back that up. CSL is clearly in there for its growth, its long-term capital growth potential. As we mentioned on the chart, it's actually grown its dividend over the last five years, and there's not many companies that have done that consistently.
While the dividend yield is low at the current point in time, if we're able to buy it levels like I think we've broadly been able to do, the growth in the dividend is really important as well. Again, this all comes out in the mix of a number of different types of exposures required for the portfolio to achieve its growth and income objectives.
Yeah, I think that's right. We have a total return but enhanced income as part of that. We still wanna generate capital growth in the portfolio over time, albeit it'll probably be slightly below the total market index in terms of capital growth because of the option activity. Okay, any questions on the phone at this point in time?
We've had no questions come through.
Okay, there's another question that's come through. Markets are talking about the likelihood of future inflation. Does Djerriwarrh or I have an opinion on gold stocks as a hedge?
Yeah, definitely a topical issue. It's something that we have discussed a lot internally. We don't own any gold stocks. Doesn't mean we won't. There is a possibility, but it's not what we've chosen to do so far. We think we've got a good level of inflation and interest rate protection in the portfolio with our bias towards quality companies overall, particularly when you look at the pricing power of companies and being able to pass on cost increases. Better quality businesses, by definition, should be able to do that. We think that largely takes care of that. We've got the topic of whether we should own gold is a really interesting one, and it's one we probably haven't resolved yet, so we'll continue to look at the space and do work on it.
Okay. Thanks, Brett. Thanks for that. Well, look, we don't appear to have any more questions at this point in time. I'll just confirm with the operator there are no questions from the phone line.
No further phone questions.
Okay, fine. We don't have any questions via the web as well. With that, I'll wrap up the presentation. Thanks for the team for doing a great job in presenting the result, which we think was a very good result for the half year, particularly in terms of the increase in the dividend. We look forward to speaking with shareholders. Again, thank you for your participation in the meeting today. With that, I'll close the meeting. Thank you.