Australian Foundation Investment Co Ltd (ASX: AFI) (AFIC) has seen its share price fall more than 4% since 9 March 2023.
While that's not exactly a major plummet, it adds to the decline the listed investment company (LIC) has seen over the last 12 months. It's now down by close to 13%.
When an attractive business falls more than 10%, I think it's worthwhile considering whether that investment is now good value.
While it is cheaper, I think investors also need to pay attention to how the AFIC share price is valued compared to its net tangible assets (NTA).
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NTA premium?
A LIC's job is to invest in other shares and assets. But, the value of its portfolio may not be the same as what the share price is trading at.
Imagine a LIC owns a portfolio of shares worth $100 million. The market capitalisation of the LIC could be $90 million, suggesting that it's valued at a 10% discount to its assets. Or the market capitalisation could be $110 million – a 10% premium. The premium would mean people are buying a basket of shares for more than they buy those individual investments separately.
Sometimes we can see premiums or discounts in the LIC world of more than 20%, though that doesn't happen with AFIC.
However, the latest update indicated that the AFIC share price for February was trading at a premium of around 5%. That's one of the lower monthly premiums since the start of COVID-19, but it's still a premium.
Sometimes investors may decide that it's worthwhile to pay a premium for the NTA if they think the investment returns are going to outperform the share market.
But, at February 2023, AFIC's net asset per share growth, plus dividends and franking, had underperformed the S&P/ASX 200 Accumulation Index (ASX: XAOA), including franking, by 2.7% over the prior year and 0.7% over the prior decade. The last three and five years showed an underperformance of the benchmark of 0.2% per annum.
However, the index returns don't include management expenses or tax, which may be applicable if an investor chooses an exchange-traded fund (ETF) focused on the ASX 200 (or something similar).
What about the dividends?
LICs have the ability to smooth out dividend payments, in contrast to the potential volatility of distributions from ASX shares.
AFIC's annual ordinary dividend had been 24 cents per share for a number of years. But, it decided to increase the FY23 interim dividend by 10% to 11 cents per share. So, that's a positive.
It has been a consistent dividend payer for many years. There aren't many ASX shares that have achieved that level of consistency.
How much is a consistent dividend worth? For investors in the accumulation phase of their life, I'd suggest it's not an integral factor. But, for retirees, it's a useful attribute.
Is the AFIC share price a good buy?
It owns a portfolio of ASX blue chip shares that may be able to deliver suitable total returns, including Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG), Transurban Group (ASX: TCL), Wesfarmers Ltd (ASX: WES) and so on.
I think its returns could continue to be pretty similar to the ASX 200 Accumulation Index while paying a resilient dividend.
But, with investors being able to buy individual ASX shares or an ETF for the actual cost rather than a premium, I don't think it's the best choice for total return growth.
