The listed investment company (LIC) Australian Foundation Investment Co Ltd (ASX: AFI) (AFIC) is one of the biggest investment businesses in Australia. It has been operating since 1928 and there are several positive aspects about AFIC shares.
AFIC focuses its investments on a portfolio of ASX blue-chip shares, which have the potential to deliver a growing stream of fully franked dividends and enhance capital invested over the medium to long term.
Over the last five years, the AFIC net asset per share growth, plus dividends (including franking), has delivered an average return per annum of 9.8%. That compares to a 9.4% average return per annum for the S&P/ASX 200 Accumulation Index (ASX: XJOA), including franking, over the prior five years.
Let's look at three positives about the business, including an attractive discount with the LIC's shares.
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Asset discount
LIC share prices can trade at a premium or discount to their underlying net tangible assets (NTA). To illustrate, if a LIC representing a basket of shares worth an NTA of $1 was trading at 90 cents, that would be a 10% discount. Likewise, a share price of $1.10 would represent a 10% premium.
Discounts are more appealing than premiums.
During the first two years of COVID-19, AFIC shares were often trading at a premium of more than 5% to the NTA and sometimes at a premium of more than 10%.
However, that premium has now turned into a discount. The last two monthly updates from AFIC showed it trading at a discount of more than 5%.
The current AFIC share price is at a 7% discount to the reported pre-tax NTA on 30 April 2024. This is close to the biggest discount it has traded at over the past decade.
Consistent dividends
No dividends are guaranteed, but AFIC has impressively maintained (or grown) its annual ordinary dividend every year over the past 20 years.
Owners of AFIC shares have experienced a high level of stability with their passive income.
Pleasingly, Transurban has increased its interim dividend in the last two financial years. In FY23, the half-year dividend was hiked by 10% to 11 cents per share. The recent FY24 half-year result saw the interim dividend increase by 4.5%.
Using the last two declared dividends, AFIC shares offer a fully franked dividend yield of 3.5% and a grossed-up dividend yield of 5.1%. Combined with the sizeable NTA discount, investors may be attracted to the LIC's yield.
Large profit reserve
AFIC pays for its dividends from the profit it makes in that year or from the profit reserve it has built up from investment returns in previous financial years.
In the FY24 first-half result, AFIC reported its revaluation reserve was $3.27 billion, its realised capital gains reserve was $485.6 million and retained profits were $1.03 billion, compared to total equity of $7.98 billion.
In other words, well over half of the shareholder equity is made up of prior profits, meaning the business could continue paying the current dividend for many years before it runs out of profit, in accounting terms at least.
This also demonstrates that AFIC has a history of growing shareholder value and being conservative with its payouts.
