AFIC wary of “full” market, boost dividends

Australia’s largest listed investment company boosted its interim dividend despite an 8 per cent fall in interim profits. Here’s why.

Australia’s largest listed investment company, Australian Foundation Investment Company boosted its interim dividend despite posting an 8 per cent fall in interim profit due to lower dividends from some of its largest holdings.

AFIC will pay 11.5 cents per share as an interim dividend, up from 11 cents a year earlier.

This is despite investment income falling 6 per cent to $162.7m due to lower dividends received from three of its top holdings, BHP Billiton, Rio Tinto and Woodside Energy.

Net profit fell 8 per cent to $150m, while revenues excluding capital gains on investments was down 5 per cent to $9.7m, the company said in a statement to the exchange.

“The dividend increase is a balancing act,” AFIC managing director Mark Freeman said.

Mr Freeman said “substantial” franking credit reserves from previous capital gains had accumulated and increasing the dividend was a way to give part of this back to shareholders.

“We felt it was right to start to send that back to shareholders through the dividend payments and that’s why we’ve increased it,” Mr Freeman said.

AFIC’s $9.2bn portfolio outperformed the index with a return of 9 per cent, including franking, for the six months to 31 December 2023. This was largely helped by rallies in building materials company James Hardie, digital car marketplace CAR Group, wheel-drive parts and accessories manufacturer ARB Corporation and plumbing supplier Reece.

“The market has had a pretty good run,” Mr Freeman said. “If you look at a lot of our stocks, we are seeing the valuations as pretty full. We are not seeing a lot of value today but we are pretty happy with what we’ve got.”

He said AFIC would continue to look for good companies but the 12-strong investment team was starting the year with a cautious stance, given the market’s optimistic expectations of a soft landing and interest rate cuts.

“Cost inflation is easing but remains elevated, while consumer sentiment is weakening, and household savings rates are starting to decline amid the higher cost of living. It is also not yet entirely apparent that the recent moderation in interest rate expectations is justified,” AFIC said in the statement.

“Geopolitical factors, which have had little negative impact on the market more recently, may still have a role to play in investor sentiment as we move into this calendar year.”

AFIC said the fund had increased its holdings in National Australia Bank, Telstra Group, CSL, Resmed, and the ASX at attractive prices in the second half of last year as they had been sold off.

Biotech giant CSL and sleep apnoea company Resmed had been particularly hurt due to the competitive threat posed by the increased adoption of weight loss drugs, including the popular diabetes treatment Ozempic.

“We added to AFIC’s holding in these companies, as we consider the increased competition is unlikely to materially impact their respective long term growth prospects,” the fund said.

AFIC has also been increasing investments in international shares and these now account for 1.3 per cent of the portfolio after starting to invest in May 2021.

It said the performance of the portfolio had exceeded the MSCI World index, excluding Australia since inception, and is considering whether to establish a separate investment vehicle in the future.

Shares in AFIC were trading 0.13 per cent higher at $7.48 at midday on Wednesday, while the broader market was 0.02 per cent lower.