Australian Foundation Investment Co.Ltd. (ASX: AFI) is the biggest listed investment company (LIC) and it has just reported its FY20 half-year result to 31 December 2019, is the share price a buy?
HY20 profit numbers
AFIC's net profit after tax (NPAT) fell by 39.1% to $146.1 million compared to the same six-month period last year.
With LICs it's important to remember that each year the profit they make is based on their investment returns. If a LIC makes a 15% return one year and then a 10% return the following year it may seem as though the net profit (all things being equal) had fallen by a third in dollar terms, even though a 10% return is normally adequate.
Investment income for the half year was $153.9 million, down from $246.7 million. In the previous corresponding period there were a number of one-off items which increased investment income that were not repeated this year. This included participation in the Rio Tinto Limited (ASX: TIO) and BHP Group Ltd (ASX: BHP) share buy-backs as well as the Coles Group Limited (ASX: COL) dividend as a result of the demerger from Wesfarmers Ltd (ASX: WES).
Excluding these one-off items, the half year profit of $146.1 million was only down 1.6%.
Investment returns
The AFIC six-month portfolio return including franking was 5.4% compared to the S&P/ASX 200 Accumulation Index return, including franking, of 3.8%.
The 12 month return to 31 December 2019, including franking, was 25.5% compared to the index's return of 25.4%. However, excluding franking credits AFIC underperformed the index with a return of 22.8% compared to 23.4% for the ASX 200 Accumulation Index.
AFIC dividend
As you've probably guessed, AFIC maintained its interim dividend at $0.10 per share.
Last year's result included a special dividend of 8 cents per share due to the miner share buy-backs. But this wasn't repeated.
AFIC portfolio
Over the last four years AFIC has reduced its holding of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) from 28% of the portfolio to 19% due to the competitive and regulatory issues.
Over the same four years, AFIC has reduced its number of positions from 95 to 70, where sustainable competitive advantages were coming into question.
The bank dividend cuts and a reduction of the portfolio in financials in genral has put a drag on short-term dividend income streams for AFIC, but a higher focus on growth shares should help long-term dividend growth.
Some of the biggest purchases were in Goodman Group (ASX: GMG), Macquarie Group Ltd (ASX: MQG) and CSL Limited (ASX: CSL).
Some of the biggest sales were NAB (due to the exercise of call options), DuluxGroup (because of the Nippon Paint takeover), Perpetual Limited (ASX: PPT), Boral Limited (ASX: BDL) and Orora Ltd (ASX: ORA).
Is AFIC a buy?
It's good to see that AFIC's total return outperformed the index over the past six months and year after a long period of underperformance.
The LIC continues to pay a solid dividend for shareholders. The prospect of higher dividends in the long-term is good news, but that could be a while away yet with the transition away from higher-yielding shares to lower-yielding ones.
At the moment AFIC appears to be trading at a premium to its net tangible assets (NTA), so I'm hesitant to buy shares – I much prefer to buy LICs at a discount to their net assets. AFIC currently has a grossed-up dividend yield of 4.7%. I think there are better value dividend shares out there.
