AFI - Australian Foundation Investment Company

[Dona Ferentes]

• A fully-franked final dividend of 14 cents per share, the same as last year’s final dividend. There is no conduit foreign income component of the dividend.
• The Board has elected to source 10 cents per share of the final dividend from capital gains, on which the Group has paid or will pay tax. The amount of this pre-tax attributable gain, known as an “LIC capital gain”, equals 14.29 cents per share.

Short-term portfolio performance was impacted by adjustments in the market resulting from geopolitical events and rising interest rates which produced a fall in many growth companies trading on high valuations. These conditions also produced fluctuations in the more cyclical stocks, where AFIC is generally underweight given its long-term investment focus. Portfolio return for the year was negative 6.8%, including franking. The return for the S&P/ASX 200 Accumulation Index, was negative 5.1%, including franking. Over 10 years, the corresponding figures are 10.5% per annum for AFIC and 10.9% per annum for the Index. AFIC’s performance returns are after costs.

 

[Dona Ferentes]

• The majority of purchases during the year focused on increasing weightings to existing holdings including Transurban Group, CSL, Domino’s Pizza Enterprises, Coles Group, Goodman Group, Carsales.com and Auckland International Airport.
• We also initiated positions in JB Hi-Fi, Mirvac Group and a small holding in WiseTech Global.
• During the 12-month period we exited Qube Holdings, APA Group, Lifestyle Communities, Origin Energy, Endeavour Group and Altium. We are observing structural industry challenges for many of these companies or an environment where competitive intensity has materially increased. We consider the growth prospects for all these companies to be increasingly challenged as a result.
• Additionally, we exited our holding in Milton Corporation and Sydney Airport as a result of takeovers.

 

[Dona Ferentes]

Half yearly out

Investment income for the six months to 31 December 2022 was $174.0 million, up from $159.4 million in the corresponding period last year. There was an increase in dividends across several holdings, with the biggest increases coming from Woodside Energy Group, Transurban, Mainfreight, Santos, National Australia Bank and Commonwealth Bank of Australia. JB Hi-Fi and Mirvac Group, along with an increased holding in BHP, also provided an uplift in dividend income.

The interim dividend for the half year is 11 cents per share fully franked, an increase of 1 cent per share from the previous corresponding period of 10 cents per share fully franked

 

[Dona Ferentes]

Portfolio adjustments
A feature of our focus on quality businesses is identifying those companies displaying attributes of pricing power over the long term. Companies owning unique assets with a market leadership position are best able to pass through rising costs. Core portfolio holdings are represented by high-quality companies we consider relatively well positioned to pass through cost increases.

We increased our holdings in BHP, Santos, Mirvac Group, Goodman Group, Seek, EQT Holdings and Woolworths at attractive prices. We consider long term prospects for all these companies remain strong. BHP will be a beneficiary of increased demand for iron ore as the China economy reopens while Santos predominantly produces LNG, a key transition fuel as the world’s energy needs move to more renewable sources.

We recently initiated a position in Breville Group, which is a kitchen appliance company operating premium brands in the cooking, beverage and food preparation categories. The business was founded in 1932, maintains a heavy focus on product innovation and has very strong global distribution which should provide for further profit growth. Breville Group has a long history of excellent financial discipline delivering strong returns for shareholders.

We exited Orica and Reliance Worldwide considering long term prospects for these companies will be increasingly challenged as competitive intensity increases.

 

[InsvestoBoy]

Seems the premium to NTA has come down for AFI significantly...still 5% but compared to the insanity of last year...

 

[DrBourse]

8/3/23 10am – Technically AFI is “Stuck between a Rock & a Hard Place”, so to speak….

Between late July 22 and today, there has been at least 11 Candle Sell Signals and abt 20 CCI Indicator Sell Signals, with abt 5 insignificant Buy signals in that same time period….

Added to that AFI has been trapped within the August 23 Benchmark Candle Formation (BCF) up until the March 23 BCF came into play, so now AFI is stuck within a Bigger BCF that ranges from $8.22 down to $7.16….

AFI is also just within the Linear Regression “Exit Zone” (see page139)….

Added to all that TA we notice that the current CCI & MFI are dropping into Range Trading Territory….

For me, in a situation like this, I would only be looking at ONE Major Support or Resistance line Above the $8.22Line and ONE Major Support Line Below the $7.16 Line – remembering that Support/Resistance Trend Lines should touch at least Five O,H,L or C points (see page 35)….

So to summarise – AFI needs the following to 'Break Away from it's present Trap' :-

A Bullish ST Breakout from a Benchmark Candle Formation is when there are 2 consecutive Green Candles wholly ABOVE the Top Benchmark Candle Formation Line, that is, OHL&C all ABOVE that Top Line - Then there needs to be confirmation from other Indicators, in my case I use the CCI & the MFI....
AND....
A Bearish ST Breakout from a Benchmark Candle Formation is when there are 2 consecutive Red Candles wholly BELOW the Bottom Benchmark Candle Formation Line, that is, OHL&C all BELOW that Bottom Line - Then there needs to be confirmation from other Indicators, in my case I use the CCI & the MFI....
THEN.....
If the SP re-enters the Benchmark Candle Formation the entire process begins again....

All I can say is, “Good Luck AFI“.

Cheers...
DrB.

 

[Belli]

Seems the premium to NTA has come down for AFI significantly...still 5% but compared to the insanity of last year...

AFI is one of the few major LICs which provide an opinion on various aspects affecting it and its shareholders.

This is from April 22 on NTA.

What it means to trade at a discount or premium to NTA

Find the latest news and updates from AFIC. Read now.

www.afi.com.au

Other articles are at this link for those interested.

News

Find the latest news and updates from AFIC. Read now.

www.afi.com.au

 

[InsvestoBoy]

I've been watching AFI and ARG as the premium to NTA has come out.

One thing I was looking at last night was the dividend yield, AFI for example is spruiking their 0.24c FY22 fully franked dividend on the front page. ARG has a similar number.

The only thing is that at the current price of $7.04, 24 cents would be giving you a measly 3.4% yield grossed up to 4.8%.

With 10Y Aus Gov bonds trading at 4% and high yield savings accounts offering 4-5%, one has to wonder how much lower index-ish large cap ASX portfolios need to go to offer a reasonable risk premium.

 

[Dona Ferentes]

I've been watching AFI and ARG as the premium to NTA has come out.

One thing I was looking at last night was the dividend yield, AFI for example is spruiking their 0.24c FY22 fully franked dividend on the front page. ARG has a similar number.

The only thing is that at the current price of $7.04, 24 cents would be giving you a measly 3.4% yield grossed up to 4.8%.

With 10Y Aus Gov bonds trading at 4% and high yield savings accounts offering 4-5%, one has to wonder how much lower index-ish large cap ASX portfolios need to go to offer a reasonable risk premium.

Wow ,,, according to that logic, Woodside , with a 10 per cent yield, should be trading around 100 bucks. CSL, with 1% yield, should be trading around 100 bucks.

 

[InsvestoBoy]

Wow ,,, according to that logic, Woodside , with a 10 per cent yield, should be trading around 100 bucks. CSL, with 1% yield, should be trading around 100 bucks.

If you think the logic is bad, why not enlighten us with the logic you use to measure the risk premium for a large cap ASX portfolio with a "dividend growth" tilt and what the risk premium for such a portfolio should be...

AFI and ARG have always marketed their fully franked dividend as one of the main reasons to invest with them and exert significant care in managing cashflows to ensure they pay it out every year even if the underlying portfolio has EPS headwinds.

If one doesn't care about a portfolio constructed around the dividend growth concept, why would any fiduciary ever invest in it after the advent of index ETFs given the essentially identical total return to benchmark?

 

[Belli]

It may depend on your personal tax rate and components in the gross amount (franking credit offset, LIC Capital gain, blah, blah, blah.)

Broad numbers for a taxpayer on 19% and no other income.

$30,000 in interest payment. Tax liability $2,114. Net income $27,886.

$21,000 ff dividend ($9,000 franking credit.)

Taxable income $30,000. Tax refund $9,000. Net income $30,000

As usual, it all depends.

 

[Dona Ferentes]

Hats off to you , Belli, for your reply.

I couldn't work out if the post was ChatGPT, or just a Random Word Generator.

 

[InsvestoBoy]

It may depend on your personal tax rate and components in the gross amount (franking credit offset, LIC Capital gain, blah, blah, blah.)

Broad numbers for a taxpayer on 19% and no other income.

$30,000 in interest payment. Tax liability $2,114. Net income $27,886.

$21,000 ff dividend ($9,000 franking credit.)

Taxable income $30,000. Tax refund $9,000. Net income $30,000

As usual, it all depends.

Did I miss something when I grossed up the yield from 3.4% to 4.8%?

4.8% is better than 3.4%, but is it enough compensation relative to the riskless 4-5% in a savings account or 4% from a 10Y government bond?

It wasn't so long ago that the dividend yield on large cap ASX portfolios was always much more than the interest on a bank account or from a risk free bond.

 

[sptrawler]

Did I miss something when I grossed up the yield from 3.4% to 4.8%?

4.8% is better than 3.4%, but is it enough compensation relative to the riskless 4-5% in a savings account or 4% from a 10Y government bond?

It wasn't so long ago that the dividend yield on large cap ASX portfolios was always much more than the interest on a bank account or from a risk free bond.

Yes ebbs and flows, oh for the 10% for 10 years term deposits. ?

What is the highest term deposit rates in history Australia?

Deposit Interest Rate in Australia averaged 5.59 percent from 1981 until 2023, reaching an all time high of 17.25 percent in October of 1989 and a record low of 0.05 percent in September of 2021.

 

[monkton]

Did I miss something when I grossed up the yield from 3.4% to 4.8%?

4.8% is better than 3.4%, but is it enough compensation relative to the riskless 4-5% in a savings account or 4% from a 10Y government bond?

It wasn't so long ago that the dividend yield on large cap ASX portfolios was always much more than the interest on a bank account or from a risk free bond.

Are govt. bonds & savings/term deposits risk free? Yes, your cash is there but if you're getting say 4% interest & inflation is 6% then you're losing 2% per year. If in term deposits there could be tax (depending on income, thus a further loss) as shown by @Belli.

Current div. from index-like AFI might not be great but that is short term thinking when we consider that index returns over the last 20 yrs. are something like 9.8% ( divs re-invested).

 

[InsvestoBoy]

Are govt. bonds & savings/term deposits risk free? Yes, your cash is there but if you're getting say 4% interest & inflation is 6% then you're losing 2% per year. If in term deposits there could be tax (depending on income, thus a further loss) as shown by @Belli.

Yeah you can make up whatever hypothetical you want to justify one or the other. What if inflation is low or negative? What if DPS growth doesn't keep up with inflation?

Current div. from index-like AFI might not be great but that is short term thinking

That is the exact question I am asking: put whatever long term projection on nominal EPS growth for the underlying portfolio (specifically designed and spruiked as dividend growth) you think is appropriate. Is a current yield of 3.5% grossed up to 4.8% (hence a price of $7.07 on 24c of DPS) worth it for the risk to your projection?

 

[InsvestoBoy]

FWIW, the 10 year price return on AFI has been a total of 28% or about 2.6% CAGR.

ARG is similar at 3%.

Essentially all the performance of total return has been in dividends. To me it seems obvious that dividend yield is a pretty good proxy for risk premium (or lack thereof) in AFI.

 

[sptrawler]

FWIW, the 10 year price return on AFI has been a total of 28% or about 2.6% CAGR.

ARG is similar at 3%.

Essentially all the performance of total return has been in dividends. To me it seems obvious that dividend yield is a pretty good proxy for risk premium (or lack thereof) in AFI.

When you are living on your investments, that is your income plus increasing your capital to account for inflation, you have to be conservative because there is no pay cheque replacing your loses.
For example with covid the share prices crashed, the dividends stopped, interest rates were zero, but you still had to withdraw money to live.

So during covid AFI's dividend stayed constant, which was fortunate because a lot of the staple dividends like banks dropped considerably.

Living on your savings isn't easy, especially when the media uses you as the go to headline. ?

 

[InsvestoBoy]

When you are living on your investments, that is your income plus increasing your capital to account for inflation, you have to be conservative because there is no pay cheque replacing your loses.
For example with covid the share prices crashed, the dividends stopped, interest rates were zero, but you still had to withdraw money to live.

So during covid AFI's dividend stayed constant, which was fortunate because a lot of the staple dividends like banks dropped considerably.

Living on your savings isn't easy, especially when the media uses you as the go to headline. ?

This is exactly my point.

AFI manages their cashflows to pay a dividend every year. Last years dividend was 24 cents. At the current price that's a yield of 3.5% with some franking credits thrown on top.

Unless we go through an economic boom that vastly increases the EPS (and therefore prices and DPS) of the underlying portfolio, it's likely the next 3-5-10 years will be similar to the last 3-5-10 years for AFI, mostly dividends and franking credits making up the majority of total return.

Given a prudent investor would normally demand a premium to take on equity risk vs the other risk free options available today returning about the same amount, is the current price (and therefore yield) providing enough of a risk premium? If not, how much further should it fall until it does?

 

[sptrawler]

Given a prudent investor would normally demand a premium to take on equity risk vs the other risk free options available today returning about the same amount, is the current price (and therefore yield) providing enough of a risk premium? If not, how much further should it fall until it does?

I guess it depends what you are after from your portfolio, the balance you want and the risk you are prepared to take on.
I bought afi quite a long time ago so ATM I'm happy to hold, would I buy more, probably not with the way term deposits are heading and the nervousness in the market.