Argo Investments (ASX:ARG) has maintained its final dividend for shareholders despite a dip in earnings to $253.0 million for the year ended June. This decline was due to lower distributions from portfolio companies.

The group's net tangible asset return after all costs and adjusted for company tax paid was +11.0%. This compares to the index return of +12.1% for the 12 months to June 30, 2024, which does not account for costs.

Management attributed the underperformance to an underweight position in the big four banks. In particular, the sale of National Australia Bank (NAB) shares appeared to be a poor decision given the bank's 38% surge in share price for the 2023-24 financial year. Commonwealth Bank gained 28%, Westpac 27%, and ANZ 20.5%.

Directors also expressed disappointment in the underweight position in Goodman Group, which experienced a 73% share price increase. However, Clarity Pharmaceuticals was a standout performer, contributing significantly to results with a remarkable 677% share price gain. This positive impact was partially offset by holdings in other healthcare stocks and APA Group.

Argo confessed in its Monday report that the lack of exposure to Goodman Group and the underweight position in the big four banks hindered its relative performance for the 2024 financial year.

The fully franked final dividend of 18 cents per share brings the total for the 2023-24 year to 34.5 cents per share, unchanged from the previous year.

In addition to franking credits, the final dividend includes a LIC capital gain component of 3.0 cents per share eligible for a tax deduction for most individuals and self-managed superannuation funds. This resulted from realizing capital gains in the portfolio, including through takeovers.

Weaker dividend streams from major companies owned by listed investment companies like Argo have also affected other investment groups such as AFIC. Equity analysts predict further pressure on dividend flows unless the economy improves over the remainder of the financial year. Mining and retail sectors are expected to report weaker results, while banks may struggle to justify higher payouts and buybacks.

Argo reported a decline in profit despite increased income from special dividends due to lower overall investment income from portfolio companies. Notably, dividends from BHP Group, Rio Tinto, and Woodside Energy decreased significantly, reflecting softer commodity prices. Income from option writing and trading activities also fell, but Argo is pleased with lower overall costs in a highly inflationary environment.

During the year to June, Argo purchased $344 million in investments, including new holdings and additions to existing positions. The company sold $287 million in investments, including through numerous takeovers. Larger purchases included APA Group, BHP Group, CSL, IDP Education, Resmed (new holding), Santos, Woodside Energy Group, and Woolworths Group. Larger sales, including through takeovers, involved Adbri, Estia Health, Invocare, Liontown, NAB, Wesfarmers, and Australian United Investment Co.

The number of companies in the portfolio decreased from 89 to 86 due to takeovers, the sale of Liontown, and the addition of Resmed.

Directors anticipate ongoing economic challenges similar to the past year and a half, including inflation, interest rates, and geopolitical factors. While inflation is moderating, the Reserve Bank of Australia's meeting on Tuesday will be closely watched. The upcoming corporate results reporting season may reveal headwinds for Australian businesses due to higher operating costs. Given current market highs, volatility is likely if companies underperform investor expectations.