Is Australian Foundation Investment Co. Ltd. (ASX:AFI) a buy after its FY18 report?

Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) is the largest listed investment company (LIC) on the ASX and has been operating for nearly a century.

It has been a steady business for shareholders and has just reported its result for FY18.

The key headline is that AFIC has maintained the final dividend at 14 cents per share and the total dividends for the year were 24 cents per share. This is the same as last year and continues AFI’s record of maintaining or growing the dividend each year.

AFIC reported that its management expense ratio was 0.14% for the year. The portfolio return over FY18, after costs, was 10.8% and 12.7% including franking. This compares to the S&P/ASX 200 Accumulation Index’s return before costs of 13% and 14.6% with franking credits.

According to AFIC, the earnings per share (EPS) was 23.6 cents in FY18 compared to 21.3 cents in FY17, an increase of 10.8%. It’s good that the earnings increased however the LIC paid out a dividend that was higher than its earnings.

Outside of the large resource businesses, AFIC said that its best performing shares were CSL Limited (ASX: CSL), Wesfarmers Ltd (ASX: WES), Macquarie Group Ltd (ASX: MQG), Oil Search Limited (ASX: OSH) and Woolworths Group Ltd (ASX: WOW).

During the year its three largest purchases of shares were Macquarie Group, CSL and Sydney Airport Holdings Ltd (ASX: SYD) and three largest sales (excluding takeovers) were Incitec Pivot Ltd (ASX: IPL), Healthscope Ltd (ASX: HSO) and Coca-Cola Amatil Ltd (ASX: CCL).

Is AFIC a buy?

Over the past decade its return very slightly outperformed the index. However I believe, and AFIC mentioned, that Australia’s large caps are likely to face long-term sluggish growth due to their maturity and market dominance. It’s hard to grow when you’re already the big fish in a little pond.

AFIC is a decent income choice with its bond-like reliable income, it is best suited for retirees. However, I think there are better ways to create growth and dividends for your portfolio.

For example, this top growth share is growing its dividend by more than 20% a year and is predicting profit growth of 30% in FY18 alone.

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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 Sydney Airport Holdings Limited and Wesfarmers Limited. The Motley Fool Australia has recommended Coca-Cola Amatil 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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