Franking Frenzy Feeds Into Record AFIC Result

2018-19 was a one-off record for Australian Foundation Investment Company (AFIC), the country’s biggest investment company and for that, it can thank the ALP’s May 18 election policy that threatened franked dividend credits for non or low taxpaying investors.

Even though AFIC led the opposition to that policy, and paid shareholders a special dividend because it reckoned, wrongly, the ALP would win the May poll, it benefited from the fear and loathing associated with the anti-ALP campaign.

And for that reason, its 2018-19 result was given a one-off boost that will not be repeated in 2019-20.

That boost helped earnings jump 46% in the year to June and allowed the company to avoid paying the cost of missing out in the tech and gold boom that impacted the ASX, especially in the June half-year.

The one-off boost and a looming slow down in profit growth for major listed Australian companies almost certainly means AFIC will not be able to repeat its record result in 2019-20.

AFIC reported a profit of $406.4 million in the 12 months to June 30, up 45.6% from 2017-18. That result included major share buy-backs by Rio Tinto and BHP and special dividends, including from the Coles demerger from Wesfarmers in late 2018.

Dividend for the year jumped to 32 cents from 24 cents thanks to a special 8 cents a share payout earlier in 2019 as AFIC feared that the ALP would win the May 18 election and change the dividend imputation system for the worse. That didn’t happen.

AFIC will pay a steady final of 14 cents a share (fully franked). A 10 cents a share interim plus a special dividend of 8 cents a share were paid to shareholders in February of this year.

AFIC shares ended steady at $6.39 in a market that was down slightly at the close.

The franking credit payouts and special dividends from the likes of BHP and Rio Tinto saw AFIC’s revenue jump from $308.5 million to $441.3 million in the year to June this year.

AFIC CEO, Mark Freeman said yesterday the June half-year boost was due to companies that had excess credits thinking that ‘if we are going to get it back to shareholders now would be the time to do that’. “So a few companies did that and it flowed through to profits.”

Apart from that factor, AFIC underperformed the ASX in the past 12 months with an 11.4% return over the year, compared to 13.4% for the ASX200 index (including dividends).

Mr. Freeman said that underperformance was due to the absence of four shares from its portfolio. The quartet performed exceptionally well in the past year; Fortescue Metals Group, Newcrest Mining, Afterpay Touch, and Magellan Financial Group.

“Gold has been very strong, very strong, and we have typically never owned gold. You don’t get a lot of dividends from them and it can be very volatile,” he said, Other older LICs such as stablemates Mirrabooka and Djerriwarrh also had no exposure to gold, as did Milton Corp.

Like Milton, Mirrabooka and Djerriwarrh AFIC cut the number of holdings in its portfolio from 91 to 76.

The company’s investments in BHP, Commonwealth Bank, Transurban, Telstra, Brambles and CSL did well but its shares in CYBG (the UK spin-off from NAB) and Challenger were not (In fact rival Milton got rid of its Challenger stake during the year).

AFIC added to its position in NAB by $88.9 million about six months ago because of an attractive dividend yield at the time.

“The more significant purchases for the year besides the NAB, included Reliance Worldwide, James Hardie Industries, Transurban Group (via participation in its rights issue to fund the WestConnex purchase), Adelaide Brighton and ARB Corporation,” the company said in yesterday’s results statement.

“There were also additions during periods of share price weakness to our holdings in Macquarie Group and CSL, as both these companies have strong industry positions and quality international franchises.

“Major sales arose through the participation in the Rio Tinto off-market share buy-back and the decision to remove some holdings from the portfolio. There was also a reduction in the holding in AGL Energy as the energy industry continues to face a further structural adjustment in the future,” AFIC said yesterday.

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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