3 things about AFIC stock every smart investor knows

These are underrated factors about the LIC.

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Australian Foundation Investment Co Ltd (ASX: AFI), or AFIC, is one of the oldest and largest investment companies on the ASX. There are several reasons to like AFIC stock.

But, the listed investment company (LIC) isn't just a good option because it's big or old.

AFIC owns a diversified portfolio, which is largely focused on ASX blue-chip shares. Some of its biggest positions include BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), CSL Ltd (ASX: CSL), Wesfarmers Ltd (ASX: WES), National Australia Bank Ltd (ASX: NAB) and so on.

But, there's more to it than just that.

There are three things that smart investors should know about it.

Huge profit reserve

It's good to know that the business has a track record of paying a stable dividend per share for investors.

But, that money doesn't just come out of thin air for AFIC stock – it's paid for by the investment returns that AFIC has made. Dividends are paid for from the (accounting) profits generated.

The LIC has been operating for almost a century, it has built up a lot of profit reserves. On 31 December 2023, its retained profit was $1 billion, the revaluation reserve was $3.27 billion, and the realised capital gains reserve was $485.6 million.

The business can afford, in accumulated profit terms, to keep paying its dividend at the current level for many years.

I think this suggests the business can continue to pay a stable dividend per share for owners of AFIC stock, even during times of wider economic distress, as we saw during the GFC and COVID-19.

International portfolio

AFIC is best known as a major investor in ASX shares, but it's also trialling investing in international shares.

This portfolio consists of what AFIC believes are high-quality companies across a broad range of industries, with strong competitive advantages and good growth potential.

The international portfolio was first initiated in May 2021, which can lead to a low-cost international LIC in the future.

At this stage, the international portfolio is a minor part of the portfolio – it was 1.3% of the portfolio in FY23, compared to 1.1% in FY22. But, that figure seems to be growing.

At June 2023, its biggest international positions were Microsoft, Apple, Alphabet, Amazon, HCA Healthcare, Nestle and Chipotle.

Low management fee

One of the best aspects of AFIC stock is its incredibly low management fee. The lower the costs, the more of the investor's money that is retained inside the portfolio.

Its management fee is currently 0.14% per annum, and there are no performance fees, making it one of the lowest-cost options for diversified ASX share portfolios.

Sometimes other managers charge so much in fees that the net returns can be materially less than gross returns.

AFIC's fees are extremely reasonable, in my opinion.

Foolish takeaway

I like AFIC – its long-term returns, including dividends, are solid. As an LIC, we can sometimes buy them at a discount to the net tangible assets (NTA). AFIC has been trading at a pre-tax NTA discount for most of the last year, which makes me think it could be a good time to buy.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, CSL, Chipotle Mexican Grill, HCA Healthcare, Microsoft, and Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Nestlé and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, CSL, and Chipotle Mexican Grill. 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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