AFIC boosts interim dividend amid strong portfolio performance
Half-Year Report to 31 December 2024
Australian Foundation Investment Company (AFIC) has reported an increase in its interim dividend in its recent half year results. AFIC focuses on delivering income and capital growth for shareholders over the medium to long term while maintaining a low management expense ratio - 0.15% annualised for the half year.
For the half-year ended 31 December 2024, AFIC declared an interim dividend of 12.0 cents per share, fully franked, up 0.5 cents from the previous corresponding period. The increase in dividend is in line with AFIC’s long-term objective of seeking to equalise the quantum of the interim and final dividends over time.
Half-year profit after tax increased by 2.7% to $154.2 million, from $150.1 million in the corresponding period last year. Earnings per share were 12.3 cents.
Portfolio Performance
AFIC’s portfolio delivered a 7.2% return including franking for the half-year to 31 December 2024, compared to the S&P/ASX 200 Accumulation Index return of 7.6%, also including franking. Over the 12-month period, the portfolio achieved a 13.2% return, including franking, outperforming the Index return of 12.7%.
The broader market’s performance in 2024 was driven by the Information Technology and Banking sectors, which saw significant re-ratings in valuations as investor confidence grew around their earnings resilience. In contrast, the Resources sector underperformed due to softening demand from China significantly weighing on commodity prices.
“The biggest drivers of portfolio performance were our relative underweight position in the resources sector as concerns about softening demand from China significantly weighed on commodity prices. To date, China’s easing policy stance is yet to materialise in accelerating economic growth”. David Grace, AFIC Portfolio Manager.
Key contributors to performance can be largely attributed to holdings in Netwealth Group, Fisher & Paykel Healthcare, ResMed, Wesfarmers, JB Hi-Fi, Goodman Group, and Macquarie Group. At the same time, challenges were noted in holdings IDP Education, Domino’s Pizza Enterprises, James Hardie Industries, and Transurban Group, which detracted from returns.
Over the long term, AFIC has delivered steady returns against the broader market. The five-year return to 31 December 2024, including franking, was 9.7% per annum, ahead of the Index return of 9.4%. Over ten years, AFIC’s return was 9.4% per annum, compared to 10.0% for the Index. This performance has been achieved while maintaining consistent dividend income and lower portfolio volatility than the market, reinforcing AFIC’s approach to stable, long-term investing.
Portfolio Adjustments and New Investments
Throughout the period, AFIC adjusted its portfolio in response to market conditions and valuation opportunities. Holdings in BHP, Woodside Energy Group, Telstra Group, Cochlear, James Hardie Industries, and WiseTech Global were increased. These purchases were made during periods of short-term negative news flow, with each company seen as having strong market positions and long-term growth potential.
New investments were made in Ampol, Worley, BlueScope Steel, and Sigma Healthcare, all selected based on their industry position and ability to generate consistent cash flow
“All the new additions were bought at prices where we felt the market was not really appreciating the medium to long-term opportunities. Specifically for Sigma Healthcare, the ACCC’s approval of its merger with Chemist Warehouse solidifies its growth prospects. We see a long-term opportunity with the continued rollout of new stores within the Australian market and expansion overseas over the medium to long term. This investment is a strong example of our strategy to focus on founder-led companies with proven leadership and long-term growth potential,” said David.
At the same time, positions in Ramsay Health Care and Domino’s Pizza Enterprises were exited due to concerns about competitive dynamics, and long-term prospects. Mineral Resources were also removed from the portfolio given the corporate governance practices that have emerged.
“We’re long-term investors and seek to hold stocks for an extended period to benefit from the power that compound annual returns deliver to long-term shareholders. We’re not looking to trade the portfolio aggressively, but there are times when valuations reach extreme levels.
“In recent times, we have also been reducing our weighting to the banks and have trimmed holdings in Reece, Wesfarmers and Macquarie Group.”
Looking ahead
Looking ahead, market conditions remain uncertain. AFIC remains focused on identifying high-quality companies with strong balance sheets, resilient business models, and the ability to generate sustainable long-term returns.
“The Australian equity market appears fully valued. Market drivers over the next 12 months look to remain challenging with macro and geopolitical factors contributing to ongoing volatility, alongside slowing earnings as economic growth and consumer confidence remain weak in developed markets. None of these scenarios can be predicted with any degree of confidence, so we’ve got to be careful about what we invest in and where we allocate money,” added David.
“The way we are managing market volatility is by keeping a broad exposure within the portfolio and focusing on quality companies. We look for businesses that can continue to grow earnings over the medium to long term. In times like this, it may take years for that to reflect in share prices but we’re comfortable with that as long as we’re invested in well-managed companies with strong balance sheets.”