AFIC profit surges on bumper dividends

Australia’s largest listed investment company warns on the challenges facing equity markets in the near term after stellar earnings.

Australian Foundation Investment Company, led by Mark Freeman, warns there are many challenges facing equity markets.

Australian Foundation Investment Company has warned on the dividend outlook as interest rates and inflation push higher, with managing director Mark Freeman calling out Rio Tinto and BHP as potential weak spots following a series of bumper payouts from the cashed-up miners in recent years.

Speaking to The Australian after handing down AFIC’s full-year results, which showed a surge in profit alongside a negative portfolio return, Mr Freeman cautioned on the challenges facing equities in the coming months as investor sentiment swings rapidly between various segments of the market.

“(The dividend outlook) could be more challenged when you look out to (February 2023) if interest rates really start to bite,” Mr Freeman said.

“That would be in certain sectors. I think the banks will probably be okay but resources stocks are now supplying a lot of the dividends. If the iron ore price goes down again then we’ll have an appearance of a market where dividends are under a bit of pressure.”

On the fund’s negative 6.8 per cent per cent return for the year, the biggest drag was the decline in the valuation of AFIC’s high-quality companies, he added.

“Quality stocks got sold off from pretty lofty valuations...but the rotations through sectors in the market are happening very rapidly at the moment. If you look at the past year, quality got bought up, then got heavily sold off, then resources and cyclicals were strong and now it’s started to go the other way.”

Despite the portfolio hit, Mr Freeman said he was convinced about the prospects for the fund’s holdings, which include the big four banks as well as CSL, Wesfarmers, Amcor and Telstra, among others.

The turnaround in sentiment away from resources and cyclicals was evidenced by the uplift in quality stocks in the first few weeks of the new financial year, he said.

BHP’s stock is down 7 per cent since July 1, while Rio Tinto is off 3 per cent, as is energy major Santos. In contrast, CBA is up 7 per cent, while Westpac and NAB have surged around 8 per cent. ANZ, which a week ago announced plans to buy Suncorp’s banking arm for $4.5bn, has risen 3.5 per cent over the same period.

For the year through June 30, AFIC’s net profit jumped nearly 54 per cent on the back of bumper dividend payouts, while revenue rose 50 per cent to $393.4m.

During the year, the LIC lifted its existing holdings in Transurban, CSL, Domino’s Pizza, Coles, Goodman Groupm Carsales.com and Auckland International Airport, and initiated positions in JB Hi-Fi, Mirvac Group and WiseTech Global.

It exited Qube, APA Group, Lifestyle Communities, Origin Energy, Endeavour and Altium, noting the structural industry challenges for these companies, alongside increased competitive intensity.

It named Amcor, Sydney Airport (prior to its takeover), Transurban, Ramsay Health Care, Macquarie Group and Computershare as companies that had performed relatively well through the year, while its slight underweight position in resources, including energy stocks, negatively affected its performance, Mr Freeman said.

While AFIC was a buyer post the Covid crash in 2020, lofty valuations had tempered buying opportunities in 2021. After the decline in the six months through June, the market was now looking fair valued, he noted.

“We think the market still has the ability to get some growth but it’s really going to depend on the state of the economy and the outlook. The markets and even the general economy are still working out what higher interest rates means, and with talk of more increases in the next six months, it’s a very uncertain time.

AFIC’s return was below the benchmark’s negative 5.1 per cent over one year, while its 10-year return of 10.5 per cent per annum was also slightly below the benchmark’s 10.9 per cent.

AFIC declared a fully franked final dividend of 14c a share, the same as last year’s final dividend. This brings the full-year dividend to 24c a share. Its shares were down 0.25 per cent to $8.06 at midday.