Wary AFIC Maintains Dividend As Profit Eases

The largest listed investment company, Australian Foundation Investment Co, has maintained final dividend at 14 cents a share and the full year payout to shareholders to an unchanged 24 cents a share as it reported a slightly better than expected result for the year to June 30.

AFIC reported a net result of $245.3 million, down 7.7% from last year, but a bit better than indicated by the 19% slide in interim profit to $118 million in February.

Revenue from operating activities was $277.7 million, down 5.4% from 2015-16.

The LIC’s management expense ratio — a key measure of its efficiency and cost of running its equities portfolio and funds management operations — was 0.14% for the year, an improvement on the 0.16% in 2015-16. The shares eased half a per cent to $6.02.

Banks are the biggest holding as a group in the AFIC portfolio.

In fact it has more than $1.6 billion (of $6.8 billion) invested in Australia’s big banks (down from the more than $1.7 billion at the end of last December thanks to the slide in prices since the budget in May).

So it was natural AFIC directors criticised the federal government over the bank levy in the May budget as an “opportunistic approach to policy” and no substitute for a full and proper approach to considered economic reform.

“The latest move to tax the five larger banks is in our view symptomatic of an opportunistic approach to policy. It is not a substitute for a more well-considered comprehensive approach to taxation and budget reform.

“Reforms are a difficult task for any government, but we believe they are necessary to create a more robust foundation for the Australian economy going forward.”

But they were more clear eyed about the outlook for the banks, warning that they are likely to have a tougher time over the next few years in generating strong profit growth because the “traditional patterns” will re-appear as the housing market softens and credit growth slows.

But AFIC was a bit more upbeat about global growth, predicting that it may continue to deliver a better-than-expected outcome for commodity prices, which should help its portfolio of mining stocks, which includes its third biggest holding, BHP, and its 8th largest holding Rio Tinto.

“There has also recently been a pick-up in non-mining investment. However, as a counter to these trends, high levels of household debt relative to real wages growth is producing a weak outlook for consumption.”

AFIC said in its statement to the ASX that there remained a number of risks to the health of the Australian economy and the business environment.

“Heightened taxation risk from federal and state governments in an environment where budgets are under pressure has unfortunately also become a recent feature of the Australian economy.

For the year, AFIC’s portfolio was up 11.7% for the 12 months to 30 June 2017 compared with the S&P/ASX 200 Accumulation Index, which increased 14.%. New acquisitions to the portfolio (above $10 million) included; Link Administration Holdings, CSL Limited, Carsales.com, Brambles, Clydesdale Bank (CYBG) and Isentia Group.

Portfolio disposals (above $10 million) included; AGL Energy, Cover-More Group and Vocus Group.

AFIC invests in Australian equities, and its top investments include; Commonwealth Bank of Australia ($654.2 million), Westpac Banking Corporation ($474.3 million), BHP Billiton ($328.6 million), National Australia Bank ($294.9 million) and Wesfarmers ($269.7 million).

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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