Is the AFIC share price a standout investment right now?

The LIC AFIC has dropped – is this a good time to buy?

| More on:
a man surrounded by huge piles of paper looks through a magnifying glass at his computer screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • AFIC shares have fallen recently, presenting investors with a cheaper price
  • However, while the NTA premium has reduced, it still does appear to trade at a premium
  • AFIC owns a quality portfolio with a good dividend history, but other investment options could be better for total returns

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).

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.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia has positions in and has recommended Macquarie Group and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

asx share price boosted by us investment represented by hand waving US flag across winning athlete
Best Shares

Here are the best-performing ASX 200 shares since the US election result

We reveal the 10 ASX stocks that have had the highest share price gains since the US Presidential election.

Read more »

A young man sits at his desk working on his laptop with a big smile on his face due to his ASX shares going up and in particular the Computershare share price
Share Market News

5 things to watch on the ASX 200 on Friday

A decent finish to the week is expected for Aussie investors.

Read more »

A smiling man at a shop counter takes payment from a female customer, with racks of plants in the background.
Best Shares

Here's why I think Wesfarmers shares are a great buy for any ASX investor

I argue that Wesfarmers offers investors both growth and income potential.

Read more »

A golfer celebrates a good shot at the tee, indicating success.
Share Market News

Here are the top 10 ASX 200 shares today

ASX investors finally enjoyed a win this Thursday...

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Industrials Shares

Up 39% in a year, is there more growth to come for this ASX 200 share?

IML Equity Analyst Josh Freiman shares his views on a major ASX 200 industrial stock.

Read more »

Man looking at his grocery receipt, symbolising inflation.
Share Market News

What the latest US inflation print means for ASX 200 investors

The ASX 200 is likely to benefit if the US Fed cuts interest rates again in December. But will it?

Read more »

guy helping girl invest in shares and dividends
Opinions

5 ways for investors buying ASX shares to stay focused during economic uncertainty

AMP Chief Economist, Dr Shane Oliver, offers advice on how to handle the Trump factor.

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why Graincorp, Light & Wonder, Orica, and Wildcat shares are falling today

These shares are having a tough time on Thursday. But why?

Read more »