Is the AFIC share price a buy after a 41% drop in profit?

The Australian Foundation Investment Co.Ltd. (ASX: AFI) share price climbed higher despite reporting a 41% drop in full year profit. What's the outlook for the year ahead?

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Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price good value right now?

Australian Foundation Investment Co (AFIC) is Australia's oldest and largest investment manager, having been founded in 1928.

Many ASX share investors know AFIC as a reliable ASX dividend share. In fact, the Aussie fund manager did well during the global financial crisis and even maintained its distributions.

However, it doesn't look so good this time around.

The AFIC share price climbed 0.7% on Monday and another 0.97% yesterday, despite announcing a 40.8% drop in profit.

So, what was driving AFIC's full-year result and what does it mean for a keen-eyed investor?

What was in AFIC's full-year result?

The investment group's net profit came in down 40.8% to $240.4 million. It was a similar story with operating revenue which fell 40.1% to $264.3 million.

Net tangible assets per share before the final dividend came in at $5.96 per share. That's down from $6.49 per share at 30 June 2020, representing an 8.2% year-on-year decline.

The AFIC share price is currently trading at $6.24 per share, down 13.11% in 2020.

AFIC announced a fully-franked final dividend of 14 cents per share. That's on par with last year's distribution, with AFIC shares to trade ex-dividend on 11 August.

A 40.8% drop in profit doesn't sound like good news. However, there were a number of one-off items that were not repeated this year.Ā That included participation in off-market share buybacks forĀ Rio Tinto Limited (ASX: RIO) andĀ BHP Group LtdĀ (ASX: BHP) as well as last year's special dividend fromĀ Wesfarmers LtdĀ (ASX: WES).

What does this mean for ASX investors?

Clearly, shareholders weren't too disappointed by the news. At the time of writing, the AFIC share price is up 1.8% since Monday and 29.5% since 24 March.

AFIC's 10-year return now sits at 9.3% on an annualised basis compared to 9.4% for the S&P/ASX 200 Accumulation IndexĀ (ASX: XJOA).

I think investors will be keen to see where AFIC is looking for their own portfolios.

Key acquisitions during the year includeĀ Goodman GroupĀ (ASX: GMG) and Telstra Corporation LtdĀ (ASX: TLS).

There were several big disposals such asĀ Treasury Wine Estates Ltd (ASX: TWE) andĀ Scentre Group (ASX: SCG).

Among the new companies added to the portfolio were Altium LimitedĀ (ASX: ALU) andĀ Netwealth Group LtdĀ (ASX: NWL).

It's perhaps unsurprising that a lot of big names from theĀ S&P/ASX 200 IndexĀ (ASX: XJO) are present in AFIC's portfolio. I've included the portfolio's top 25 holdings as at 30 June 2020 in the graph below.

Table: Author's own. Data source: AFIC FY20 report

These 25 ASX shares make up 76.3% of AFIC's portfolio value. That means the performance of shares like CSL LimitedĀ (ASX: CSL) will be the key to where the AFIC share price will finish in 2020.

Foolish takeaway

Given the share price movement this week, investors didn't mind the 40.8% profit drop from the Aussie listed investment company.

AFIC did report that the outlook "remains unclear". In particular, the company said it was "difficult to reconcile the expansion of market valuations with the pressure on company profits, and dividends are likely to remain under."

That's pretty telling from the Aussie fund manager and a potentially ominous warning.

However, I wouldn't be betting against the AFIC share price climbing higher in the next 12 months.

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of Netwealth and Wesfarmers Limited. The Motley Fool Australia has recommended Scentre 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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