AFIC acts to thwart ALP move

AFIC has begun to re-engineer its $7bn equities portfolio to defend the value of franking credits ahead of the federal poll.

Mark Freeman, managing director of Australian Foundation Investment Company. Picture: Aaron Francis

The nation’s biggest listed investment company, Australian Foundation Investment Co, has begun to re-engineer its $7 billion equities portfolio by dumping almost half its stake in Rio Tinto and selling down shares in BHP to defend the value of franking credits ahead of any future federal Labor government overhauling the franking regime.

The Melbourne-based AFIC will immediately distribute much of those funds from the twin selldowns to its own shareholders, yesterday declaring a special dividend of 8c a share to be paid late next month as it races to get the money into the hands of its shareholders to beat any devaluation of the franking brought on by a change in government.

The decision by the 90-year-old investment fund to sell holdings in the heavyweight miners is the first time a publicly listed investor has admitted to selling shares because of fears of the impact of the ALP policy, and comes from one of the most conservative blue-chip listed investors in the nation.

$6.19 AFIC closed up 7¢

And other investment funds could soon follow AFIC’s lead, with the largest publicly listed companies sitting on combined franking credits worth as much as $45bn, all of which could be substantially cut in value by a policy to abolish cash refunds for excess dividend imputation credits.

Opposition treasury spokesman Chris Bowen yesterday hit back at those taking advantage of the franking system and warned the current system of dividend refunds encouraged investors to be overweight Australian shares — which was risky.

“Investors should make economic decisions because of economic fundamentals not because of favourable tax treatment. The current system encourages people to be overweight Aussie shares, meaning they have not adequately spread their risk and may suffer significantly in a downturn because of this overweighting,’’ Mr Bowen told The Australian.

AFIC, which yesterday unveiled its December-half results to show net profit rose 75.4 per cent to $239.8 million as its investment income increased 62.5 per cent to $250.3m, told investors yesterday it had sold more than $120m worth of shares in the twin mining giants over the past few months.

It walked away from large holdings in Rio and BHP, which are cornerstones of most conservative share funds. AFIC sold $105m worth of Rio shares, or 40 per cent of its stake, and 3 per cent of its BHP shares, worth just under $16m, into share buybacks from both companies.

Rio has now fallen from being AFIC’s sixth-biggest holding to its 12th, while BHP is still its second-biggest holding.

AFIC chief executive Mark Freeman told The Australian the investor had to act to protect the value of franking credits for its own shareholders given the uncertainty around the ALP policy and that it was crucial to get those funds into its investors’ hands this financial year ahead of any legislative changes that could take ­affect from July 1 if the ALP won the next election.

“We think for a lot of shareholders franked dividends are a very important part of total return so when we are looking at these buybacks we have to make a decision, do you go in or not,” he said.

Last year Rio returned $US3.2bn to its shareholders via a share buyback, with the funds coming from its disposal of coal assets, while BHP announced a $10.4bn shareholder return. Both buybacks were rich in franked dividends.

“The stock price for Rio Tinto was $80, it was selling at around $70 in the buyback, but full value with franked dividends was about $90. Most feedback (from shareholders) is they appreciate franked dividends and we made the assessment to go in (the buybacks) but it does drag on our performance,’’ Mr Freeman said.

The company also revealed that its 130,000 investors were asking why they were being punished for its investments in some of Australia’s largest companies. “This is going to hurt a lot of people who are saying ‘I’m not rich, I’m not wealthy and why am I being forced to go on a higher tax bracket through this?’,’’ Mr Freeman said.

Last year, Bill Shorten unveiled a policy to claw back almost $60bn over 10 years by abolishing cash refunds for excess dividend imputation credits.

Mr Bowen said yesterday: “Politics is about choices — and Labor makes no apologies for choosing schools and hospitals over tax concessions that overwhelmingly benefit the wealthy.

“The cost of excess imputation credits will soon outweigh what the commonwealth spends on schools or child care. That’s unfair and unsustainable.

“Ninety-two per cent of taxpayers do not receive excess imputation credits and Australia is the only developed country in the world that ­allows these credits.”

Mr Freeman argued if investing in Australian shares was made less attractive because of the removal of the franking credit refunds, there was no substantive alternative asset class investors could switch into that would provide an adequate income return.

Mr Freeman said the ALP plans meant a conservative long-term investor such as AFIC had to consider its own equities holdings and sell down shares if that meant it could safeguard franking credits for its own investors, many of whom were retirees that relied on these credits to pay for the necessities of life.

The company declared an interim dividend of 10c a share fully franked, flat against last year, as well as the special dividend of 8c a share.

Both dividends will paid on February 25.

Last week the $360m Mirrabooka fund, which is also part of the Australian Foundation Investment Co stable, announced it would pay its traditional end-of-year special dividend more than six months early to get ahead of Labor’s vow to scrap the cash rebates on franking credits.