Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy?
After the release of AFIC's August monthly update, the share price is up by 1% – investors seem to think it was worth buying.
If you don't already know, AFIC is a listed investment company (LIC), one of the oldest in Australia. Its job is to invest in other businesses on the ASX to generate a profit and growing income stream for shareholders.
Each month it tells investors how it's going and what the underlying value per share is, which is expressed as the 'net tangible asset (NTA) backing per share'.
AFIC revealed that at the end of August 2019 the before tax NTA was $6.35 and the after tax NTA was $5.41, the after tax figure shows what value would be left if all the share holdings were sold and taxes were paid on any gains – although AFIC has no intention of selling all of its shares.
The LIC is known as a long-term investor and chooses Australian blue chips it thinks can deliver attractive long-term returns. Some of its top 25 holdings include Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Transurban Group (ASX: TCL), SEEK Limited (ASX: SEK) and Sonic Healthcare Limited (ASX: SHL).
It has very low management cost of 0.13% per annum with no performance fees. But sadly for shareholders, AFIC's returns have been underperforming the index in recent years. When you look at the net asset per share growth plus dividends (and franking), it has returned 8.6% over the past year, 7.5% per annum over the past five years and 9.9% per annum over the past decade. Meanwhile the S&P/ASX 200 Accumulation Index's return has been 10.8%, 8.5% and 10.2% respectively.
That means that over the past year and five years, the underperformance has been at least 2% each year, although the index returns don't include management fees or tax – but it wouldn't amount to the difference 2%.
However, there are two selling points for AFIC. Right now it's consistently trading at a slight discount to its underlying NTA value. It also has been very consistent with its dividends, which is useful for people looking for income security in retirement.
Foolish takeaway
I'm always open to buying LICs at a discount, but the discount would need to be around 10% or more for me to be interested. A discount is better than a premium, but I'd rather buy the index compared to AFIC.
