The Australian Foundation Investment Co Ltd (ASX: AFI) share price (AFIC for short) is having a decent day this Monday. AFIC shares are currently sitting at $8.27 each, up 0.24% for the day so far. That looks pretty good against the S&P/ASX 200 Index (ASX: XJO) which is down 0.1% so far today at 7,449 points.
AFIC is a Listed Investment Company (LIC). That means it is very similar to other ASX shares that we'd all be familiar with. LICs have ASX-listed share prices, market capitalisations and dividend yields, just like most other ASX shares.
However, something an LIC has which an ordinary company does not is a net tangible asset (NTA) backing. Even though LICs are technology companies in their own right, most function in a similar fashion to a managed fund. That is, they invest clients' money on their behalf into a portfolio of financial assets like shares. In AFIC's case, this LIC has made a name for itself over decades as a stable, dividend-paying LIC that primarily invests in blue chip ASX 200 shares.
As of 31 October, its top 5 holdings were Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), BHP Group Ltd (ASX: BHP), Macquarie Group Ltd (ASX: MQG), and Wesfarmers Ltd (ASX: WES).
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AFIC share price commands NTA premium
Like most LICs, AFIC publishes its own NTA every month. This metric tells us how much AFIC's investment portfolio is worth on a per-share basis. So, as of 31 October, AFIC's NTA per share stood at $7.51. That means that each AFIC share represents $7.51 in underlying shares, cash and other assets.
Now you might notice something strange about that metric. It happens to be rather different from AFIC's actual share price. In fact, with AFIC shares trading at $8.24 currently, this represents a premium of roughly 10% over the NTA baking of each share.
This is quite common with LICs though. Of the dozens of LICs on the ASX, few actually consistently trade at their NTA value. Sometimes, the market assigns a premium to an LIC if it has a strong track record of solid management or market outperformance. This is what we see with AFIC right now.
Other LICs that perhaps haven't proved themselves, or have a poor history of returning value to shareholders, might trade at a discount, reflecting the market's lack of confidence.
Fortunately for AFIC investors, the market seems happy to grant a hefty premium to AFIC shares over their NTA, perhaps reflecting its decades-long track record of ASX investing.
At the current AFIC share price, this LIC has a market capitalisation of $10.1 billion and a dividend yield of 2.91%.
