AFIC Dips Into Reserves To Support Dividend As Profit Slips 40%

By Glenn Dyer | More Articles by Glenn Dyer

Australian Foundation Investment Co is dipping into reserves to pay an unchanged final dividend for the year to June 30 after a big fall in profit.

The country’s largest listed investment company said it earned a net profit of $240.4 million down from $406.4 million in 2018-19.

Net profit attributable to members (excluding minority interests) was $239.9 million, 40.9% down.

Earnings fell because of the absence of big buybacks and spin-offs like those from Rio Tinto, BHP, and Wesfarmers which provided that big boost to earnings in 2018-19

Revenue from operating activities for 2019-20 was $264.3 million, down 40.1% down from the prior year.

A fully-franked final dividend of 14 cents a share was declared, unchanged from 2019, taking the total for the year to 24 cents, also unchanged.

A special dividend of 8 cents was paid with the interim dividend in February 2019 to use up franking credits in the event the ALP won the 2019 election and changed the rules on credits.

That means there was actually a 25% slide in total dividend for the year to June.

Total dividend was more than the company earned in the year to June, so it had to dip into reserves to maintain the payout to shareholders.

“AFIC, as a long-standing listed investment company, has reserves that can be used in difficult times. Drawing upon these reserves, the final dividend was maintained at 14 cents per share fully franked despite the fall in income in the second half,” directors told the ASX in a statement.

Looking at the year it was dominated by the COVID-19 pandemic in the final five months to June 30.

“Economic conditions have been extremely challenging for many businesses, as the fallout from the COVID-19 outbreak negatively impacts many Australians,” directors said.

“Equity markets have also been very volatile following the all-time highs reached in late February, as governments and central banks try and respond to deteriorating conditions and control of the virus remains uncertain.”

During the period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies it wanted to own more of. This included participation in the recent deeply discounted capital raisings that have occurred.

A number of purchases were undertaken during the year. This included placements in National Australia Bank, Cochlear, Auckland International Airport, Oil Search, NEXTDC, Ramsay Health Care, Reece, and Qube Holdings. Major additions included Goodman Group, Telstra (to bring some income into the portfolio), Macquarie Group, Cleanaway, and Sydney Airport.

While there has been a reduction in the number of holdings in the portfolio over the year from 76 to 61, three new companies were added, given we consider the long term opportunity for each business to be attractive: Altium, Netwealth, and Ryman Healthcare.

Major sales included the complete disposal of holdings in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton, and Perpetual, as these funds were deployed elsewhere in the portfolio. There was also some small trimming of the position in James Hardie Industries, although this remains a major holding in the portfolio.

Looking to the coming year directors are obviously worried about high prices and stretched valuations given the high level of uncertainty.

“As we move into the new financial year, the outlook remains unclear as companies face an extremely difficult operating environment. While recent fiscal and monetary support has provided some breathing space for the economy, the environment moving forward is going to be largely dictated by the progress made on suppressing COVID-19 in Australia and across the globe.

“In this environment, it is difficult to reconcile the expansion of market valuations with the pressure company profits and dividends are likely to remain under.

“Given the strength of the market since the lows recorded in March and the further adjustments that have been made to the portfolio during this market weakness, we are content to be patient. We believe the portfolio is well-positioned to withstand further volatility given the high quality of companies in the portfolio,” directors said yesterday.

AFIC shares rose by 0.6% to $6.18.

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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