Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy?
AFIC is the largest listed investment company (LIC) on the ASX with a portfolio $7.5 billion in size at the end of April 2019, it's also one of the oldest LICs.
I like a lot of the factors that define AFIC's history and goals. It invests in other ASX shares on behalf of its shareholders and aims to provide a growing stream of fully franked dividends whilst also creating capital growth over the medium-to-long-term.
One other aspect that I really like is that it has no performance fees and only charges a management fee of 0.14% per annum, leaving higher net returns for investors.
It has been providing its shareholders a solid dividend payment for a very long time. Over the past two decades it has maintained or increased its dividend every year.
AFIC currently has an ordinary grossed-up dividend yield of 5.7%, which isn't bad in this era of low interest rates.
What I do like more about AFIC recently is that it's trading at a discount compared to the underlying value of its net tangible assets (NTA). It's currently valued at a 4% discount, it hasn't been this 'cheap' for at least a couple of years.
However, I think there are a couple of understandable reasons why people don't value AFIC as highly at the moment. The first reason is that Labor's proposed franking credit amendment would reduce the effectiveness of AFIC's fully franked dividend.
The other reason is that AFIC's portfolio has consistently underperformed the S&P/ASX 200 Accumulation Index, including the franking credits, over the past year, five years and ten years. AFIC's investment performance is generated by its underlying holdings. Most of its largest holdings haven't been great in recent years such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB). Investors might prefer owning the index if AFIC continues to underperform into the future.
Foolish takeaway
AFIC is looking better value than it has done in a quite a while, but I'm also less optimistic about the medium-term prospects of the big ASX banks, which is a sizeable part of AFIC's value. I'm not interested in buying AFIC shares at today's price.
