Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy during coronavirus?
AFIC is the largest listed investment company (LIC) on the ASX. Its job is to invest in other shares on the ASX on behalf of its shareholders.
In times like this it can be very reassuring to be invested in a business that has been around for almost a century and has seen countless economic disasters. But is it a buy?
Since 21 February 2020 the AFIC share price has fallen around 20%. Interestingly, the S&P/ASX 200 Index (ASX: XJO) is actually down by 26.3%.
Here are some things to think about:
Top holdings
The performance of a LIC is largely dictated by the shares it owns.
At the end of March 2020, its biggest share allocations were: CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Transurban Group (ASX: TCL), Westpac Banking Corp (ASX: WBC), Wesfarmers Ltd (ASX: WES), National Australia Bank Ltd (ASX: NAB) and Woolworths Group Ltd (ASX: WOW).
Some of these shares like CSL and Woolworths are holding up quite well during this period. But banks and Transurban may be in for a tough time for their earnings in the shorter-term.
Net tangible assets (NTA) premium
I think the smaller fall by the AFIC share price indicates that investors haven't quite appreciated how hard the AFIC portfolio has been hit.
AFIC disclosed that at the end of March 2020 its pre-tax NTA was $5.18, whereas the share price was actually sitting at $5.65, meaning the share price was trading at a 9% premium (and an even bigger premium to the post-tax NTA).
This premium is among the largest premiums AFIC has traded at over the past decade. It doesn't make a lot of sense to invest in at such a high premium when you could get very similar investments at a cheaper price with an investment in BetaShares Australia 200 ETF (ASX: A200) or Vanguard Australian Shares Index (ASX: VAS).
Dividend
The AFIC dividend is famous for being reliable. It receives big dividends from ASX blue chips and passes that through to shareholders. The trailing AFIC grossed-up dividend yield is 6%.
AFIC has maintained or grown its dividend every year this century so far. But the coronavirus will be a test. Many shares will probably cut dividends this year, particularly the ones among AFIC's largest holdings like the banks.
The LIC may be able to maintain the dividend, but that might eat into the capital value of AFIC's portfolio, which will lessen the asset value recovery when it comes.
Foolish takeaway
AFIC's portfolio has done well compared to the ASX 200 over the past year. But I don't think it's a good idea to buy something for an expensive premium to its assets unless it offers something quite different (and better) to index returns. It's not a buy for me, but current shareholders should be able to keep holding for the long-term.
