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Is the AFIC share price a buy?

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

It could be worth considering with the AFIC share price down 5% since the beginning of August.

AFIC is the largest listed investment company (LIC) on the ASX and it’s also one of the oldest. At the end of December 2018 its portfolio was $6.8 billion in size. It’s one of the most likely ASX shares to exist 50 years from now.

The LIC aims to provide shareholders with attractive investment returns through a growing stream of fully franked dividends and capital growth over the medium to long term.

Its top holdings resemble the ASX index fairly closely. Its biggest five investments are Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), CSL Limited (ASX: CSL) and Transurban Group (ASX: TCL).

One of the most attractive features of AFIC is its incredibly-low management fee. The cost is 0.14% per year, with no performance fees. Low fees mean more net returns left for shareholders, which is why some ETFs are good choices for investors.

The most attractive thing about AFIC is its steady dividend. Over the past two decades it has maintained or increased its dividend every year. Retirees have been able to sleep easy at night knowing the next dividend won’t be lower than last year’s. It currently has a grossed-up dividend yield of 5.7%.

However, things are getting tougher for AFIC. The poor returns and lack of dividend growth of most of its large holdings has seen its 5-year net asset per share growth plus dividends (including franking) return per annum fall to 5.5%. Over the past year its return was a negative 2.3%.

The poor returns are why AFIC’s dividend has been unmoved over the past three years, meaning the income is falling behind inflation.

AFIC has been paying out all of its earnings as dividends in recent years, leaving no money for re-investment to grow the earnings or dividend.

Is AFIC a buy today?

AFIC is currently trading at a 6% premium to the pre-tax value per share and a 21.5% premium to the post-tax value per share. This doesn’t represent good value to me, particularly when you can buy the Vanguard Australian Share ETF (ASX:VAS) at the value of the shares.

I think there are ASX shares out there with better growth and income potential at a better value.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Transurban Group. 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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