AFIC increases final dividend, portfolio outperforms in strong markets
AFIC has a long history of stable and growing fully franked dividends over time as well as delivering attractive total returns over the medium to longer term. In the following article, we provide an overview of our financial results for the full 2023-24 financial year (FY24) and explain some key movements in the portfolio over the last year and what they mean for investors.
AFIC’s $9.9 billion portfolio delivered a strong performance for FY24, outperforming the S&P/ASX 200 Accumulation Index with a return of 15.1% including franking compared to 13.5% for the index over this period, which also includes franking.
The largest contributors to the 12-month portfolio outperformance were meaningful holdings in CAR Group, Goodman Group, Wesfarmers, Reece, Netwealth, and ARB Corporation.
The best performing sectors for the Index were Financials, up to 29% and Information Technology which rose to 28.4%. Meanwhile having limited exposure to lithium companies contributed meaningfully to the fund’s outperformance. We have long been cautious on the supply response to the rapidly rising lithium price in 2022. The lithium market is now in surplus which has resulted in equity prices for lithium companies falling sharply.
We declared a fully franked final dividend of 14.5 cents per share, a 0.5 cent increase on last year. This brings total fully franked dividends applicable for the year to 26.0 cents per share, an increase of 4.0% from the previous financial year’s total fully franked dividend of 25.0 cents per share.
AFIC delivered a Full Year Profit of $296.4 million, down from $310.2 million in the PCP (previous corresponding period). This decrease was driven by the expected lower dividends from the resources and commodities sector where for instance we received $19 million less from BHP and just under $8 million less from Woodside than in the previous years. The extent of this decline was somewhat offset by adjustments made to the portfolio throughout the year and improved income from a number of companies in the portfolio including the four major banks.
We’ve been recycling capital into existing holdings
In managing the portfolio, our core strategy is to invest in quality companies over the long-term with the aim to generate strong compounding returns. To best position the portfolio to meet our investment objectives we look to maintain a balanced mix of income and growth attributes.
Market valuations are at the top of what we consider to be a fair value range and the operating environment is highly variable, requiring us to be particularly discerning in our investment decisions.
Activity in the portfolio was focused primarily on recycling capital into existing holdings where we captured periods of share price weakness and increased our positions. This was the case for Goodman Group, James Hardie, CSL, WiseTech, and ResMed as we remain confident in the long-term prospects for these companies.
We also added to BHP and Woodside after meaningful share price falls. Both companies are low-cost producers and maintain excellent balance sheets making them an attractive long term investment. We added to Telstra at a price that reflects an attractive dividend yield and consider the company to be well-positioned to grow earnings and cash flow over the medium term.
We trimmed positions in CAR Group, Reece, Woolworths, Wesfarmers, Mainfreight, NAB, and Westpac following strong share price runs to what we consider extreme valuations.
We exited holdings in IRESS and Ansel as both are facing significant structural industry challenges and competition.
We expect the drivers of market returns to broaden and remain focused on the fundamental
Domestic economic growth has moderated providing a more challenging backdrop for companies to deliver earnings growth. While slowing consumer spending reflects the challenges of the rising cost-of-living.
On a more positive note, interest rates appear to be closer to the end of the recent raising cycle.
We expect the drivers of market returns to broaden moving forward and our efforts remain focussed on the fundamentals of the companies. In this regard, we feel the portfolio remains invested in well-managed companies with a track record of financial discipline, owning strategic assets and maintaining strong balance sheets.
We are exploring options for the future of the AFIC global portfolio
The global portfolio was first initiated in May 2021 and has exceeded its benchmark index, the MSCI World Index ex Australia, over FY24 and since its inception to 30 June 2024.
We are exploring options for its future, including the potential to establish a separate low-cost global investment company however this will take time considering the legal and financial preparations required.
Since its inception AFIC has invested a total of $103.7million of shareholder capital in its global portfolio, which is now valued at $147.5 million, as at 30 June 2024. At this current value, the global portfolio represents about 1.5% of the overall AFIC portfolio.
Over the last 12 months performance of the companies within the global portfolio has been pleasingly strong. We continued to build our position in Nvidia as well as increasing our exposure to Freeport McMoran, Netflix, Meta, Nextera Energy and Fortinet. These purchases were completed at attractive levels and well-below the current prices. We also established one new position, Halma plc. These investments were funded through the complete sale of Roche Holdings and a reduced holding in Starbucks, along with the proceeds from trimming some of our recent outperformers such as Ferguson, L’Oréal, Mastercard and Visa.