The ASX financial share Australian Foundation Investment Co Ltd (ASX: AFI) (AFIC) looks very attractive to me for a few different reasons.
It's Australia's largest listed investment company (LIC) and also one of the oldest. It's not an operating company that sells furniture or makes software; instead, it invests in other shares.
Buying AFIC shares means owning a portfolio of shares. Some of the portfolio's biggest positions include Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), CSL Ltd (ASX: CSL), Macquarie Group Ltd (ASX: MQG), and Wesfarmers Ltd (ASX: WES).
But, while the portfolio's diversification and low costs (0.15% per annum) are compelling, there are three reasons why I think it's a very good time to invest in AFIC shares.
Large valuation discount
One of the most important things to know about LICs is that the share price can trade at a premium or discount to the net tangible assets (NTA). In other words, a $1 basket of shares could trade on the ASX for $1.10 (a 10% premium) or 90 cents (a 10% discount). The premium or discount can steadily change over time as investors gain or lose confidence in the LIC.
For most of the last decade, the ASX financial share has traded at a premium to its NTA, with a small period of time where AFIC shares traded at an NTA discount of under 5%.
The latest weekly NTA update showed AFIC's pre-tax NTA per share was an estimated $8.16. That compares to the current AFIC share price of $7.35.
The current NTA discount is approximately 10%, which is very close to the largest NTA discount of the past decade. That makes it look very compelling, particularly when recent portfolio performance is taken into account.
Outperformance
We can sometimes see a LIC discount arise or widen when the portfolio delivers low investment returns or underperforms its benchmark, but that hasn't been the case recently.
AFIC reported in its August monthly update that over the prior 12 months, its net asset per share growth plus dividends (including franking) was a 19.2% return, outperforming the 16.2% return for the S&P/ASX 200 Accumulation Index (ASX: XJOA), including franking.
Over the past five years, that same net return measure from AFIC was an average of 10.6% per annum, compared to a 9.5% average per year return for the ASX 200 Accumulation Index.
AFIC's portfolio has been delivering good returns, yet the NTA discount has widened. The ASX financial share's strange share price performance has meant stronger returns can come through dividends than if the AFIC share price were trading at its NTA level.
Dividend growth from the ASX financial share
AFIC kept its annual ordinary dividend per share at 24 cents for quite a few years but has recently returned to dividend growth.
In FY22, the ASX financial share paid 24 cents per share, which increased by 4.2% to 25 cents per share in FY23.
The LIC increased its annual dividend per share by another 4% to 26 cents per share in the 2024 financial year.
That means the current dividend yield is a fully franked yield of 3.5% and a grossed-up dividend yield of 5%.
With a growing dividend, large NTA discount and solid portfolio performance, I think this is the right time to invest in AFIC shares for interested investors.
