AFIC boosts dividend despite underperformance

The nation’s largest listed investment company will pay out a higher dividend after investment income lifted in the first half.

The nation’s largest listed investment company is confident in the near-term outlook for earnings and dividends but has warned of a more murky landscape beyond the next six months, with the potential lag effect from interest rate rises still a risk.

Speaking to The Australian after handing down half-year results for the $9bn Australian Foundation Investment Company, managing director Mark Freeman said the equities investor was once again sitting on the sidelines following the sharemarket’s rapid recovery through January, with valuations now closer to “full” and less appealing than late in 2022.

Mr Freeman said he had been surprised by the recent strength in the local sharemarket — the S&P/ASX 200 has gained more than 7 per cent this month — but put it down to a rosier near-term outlook.

“The tech sector and a couple of other sectors have been starting to protect their cost bases, which is improving the profit outlook a bit. And then on earnings, the companies that have been giving updates have probably been a bit better (than expected),” Mr Freeman said in an interview.

“But we’re still wondering whether, with all the interest rate increases and input costs, there’ll be a lag effect. People keep living the same way for a while before they start to slow down. And in the face of all that, employment has been very strong and there‘s been wage rises pushed through. So we’re wondering whether the impact of all of this will start to hit profits.”

The listed investment company returned 7.1 per cent over the six months through to December 31, well below the benchmark’s 10.8 per cent return over the same period, as share price declines and an underweight position in resources companies worked against it.

The largest drag on relative performance was the decline in the valuation of high-quality companies, including ARB, James Hardie, Mainfreight and Transurban, Mr Freeman said on Monday.

Its smaller position in resources, including energy and lithium stocks also negatively impacted performance, he added.

AFIC topped up its holdings in BHP and Santos in the half, taking advantage of share price weakness, he added.

Even with the recent top-up, AFIC is still underweight BHP. But with the miner’s share price surging in recent weeks and sitting just below its all-time highs, Mr Freeman said the long-term investor is not a buyer at these levels.

The near-term view for the big miners and major banks is positive, but longer term it gets a bit more uncertain, he cautioned.

“The iron ore stocks are still holding up pretty well as are the banks, their balance sheets are really good. When you go beyond six months, you start to think, is the iron ore price going to roll off a bit, do you start to get the housing slowdown and does that affect (banks’) ability to pay dividends?

“For now, the outlook is okay. A lot of the industrial companies, growth stocks, are still growing profits, so I expect to see growth in dividends in those areas of the market. But perhaps looking into next year it might be slightly different.”

He is watching for any buying opportunities that could come through in the February earnings season but sees more chance of that happening in August or even the February 2024 season, when more companies may disappoint in their updates.

Despite the recent underperformance, AFIC increased its dividend by 10 per cent as investment income jumped to $174m, up from $159.4m in the corresponding period last year.

Higher dividends came through from several holdings, with the biggest increases coming from Woodside, Transurban, Mainfreight, Santos, National Australia Bank and Commonwealth Bank of Australia.

JB Hi-Fi and Mirvac Group, along with an increased holding in BHP, also provided an uplift in dividend income, AFIC said.

The lift in income saw the LIC declare an interim payout of 11c per share, up from last year’s 10c per share. The dividend will be paid on February 24 to shareholders on the register on February 3.

Despite the near-term portfolio underperformance, AFIC said it was confident in its strategy.

“A feature of our focus on quality businesses is identifying those companies displaying attributes of pricing power over the long term. Companies owning unique assets with a market leadership position are best able to pass through rising costs,” the company said.

CBA, BHP, Westpac, CSL and Wesfarmers were among its top contributors over the half.

AFIC shares closed up 0.9 per cent, or 7c each, at $7.57.