Is the Australian Foundation Investment Co. Ltd. (ASX:AFI) share price a buy?

Credit : Will

Is the Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) share price a buy after its latest monthly update?

AFIC is one of the oldest businesses on the ASX. It has been operating as a listed investment company (LIC) since 1928.

Here are my reasons why I think it could be a buy, or not:

A buy

AFIC has shown wonderful longevity for its shareholders. You could have bought shares of it 50 years ago and seen it steadily increase in value. It’s this type of ultra-long-term growth that may allow you to sleep easy at night.

Its holdings are quite diversified with it owning shares of many of the ASX’s leading businesses like CSL Limited (ASX: CSL), Amcor Limited (ASX: AMC) and Macquarie Group Ltd (ASX: MQG).

The returns it produces are quite passive, which is reflected in its very low annual management fee of 0.14%. The lower the returns the more that are left for investors.

A particular attraction of AFIC is its commitment to paying a steady dividend. When you look at the past 20 years it has maintained or increased its dividend every year.

Not a buy

It’s generally a good idea to buy things at a discount to their underlying value rather than a premium. Its current share price of $6.14 is trading at a 5.5% premium to the before-tax NTA of $5.82 of AFIC at the end of October 2018 and a 22% premium to the after-tax NTA of $5.03.

Considering you can essentially buy these assets at NTA with Vanguard Australian Share ETF (ASX: VAS) I’m not sure it makes sense to buy AFIC shares unless you believe it’s going to outperform the ASX.

My other main concern with AFIC at the moment is how much of the portfolio is allocated to the big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). Around 20.5% of the portfolio is allocated to just those four shares.

Whilst the banks generate a pleasing level of dividend income, the Royal Commission may seriously hurt profit growth over the next few years, as we are already seeing. AFIC can’t escape from the underlying performance of its holdings.

AFIC’s dividend growth has slowed up considerably in recent times.

Foolish takeaway

AFIC has been a very reliable dividend payer. However, I don’t think it’s the best dividend stock, the best value or the best growth stock at the current price. It’s much better if you can buy shares with assets at a discount. So, I’d keep it on the watchlist for now.

Instead, a better dividend share could be this defensive option which just grew its dividend by 20% in FY18.

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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 National Australia Bank 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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