Australian Foundation Investment : AFIC lifts HY profit and dividend

AFIC has reported a higher interim profit and dividend, as dividend income from its portfolio recovered.

AFIC's profit for the half year to 31 December 2022 was $163.7 million, up 12.2% on the profit of $146.0 million in the prior corresponding period. Revenue from operating activities was $178.1 million, up 10.1% from a year earlier.

The interim dividend was 11 cents per share, fully franked, up from 10 cents per share, fully franked, in the prior corresponding period. One of our investment aims is to provide attractive dividend growth for our shareholders over time.

Our management expense ratio is 0.13% (annualised), with no extra fees.

We remain an investment company that has low costs and lower volatility than the market, and low portfolio turnover that produces tax-effective outcomes for shareholders.

Our high-quality companies have good prospects

Our portfolio return for the half year was 7.1%, including franking, compared to the return for the S&P/ASX 200 Accumulation Index of 10.8% including franking. Market adjustments resulting from rising interest rates impacted our portfolio's short-term performance. The share price of many of the quality companies in the portfolio fell after having traded at very robust valuations. These included ARB, James Hardie Industries, Mainfreight, and Transurban. These companies have delivered very strong returns over the past five years.

Despite the fall in share prices, we believe these companies have good prospects. They have a long track record of excellent financial discipline and delivering strong returns to shareholders. These are key considerations in our long-term investment approach.

In the half year, the benchmark index was led by strength in the materials, energy, and banking sectors. The materials sector benefited from China's announcement that it would re-open its borders after lifting COVID-19 lockdowns. Additionally, the energy sector benefited from higher coal prices resulting from supply chain challenges and the war in Ukraine. The banks delivered solid operating results, with productivity gains offsetting higher costs.

Our performance relative to the benchmark was also negatively impacted by our underweight position in resources, which includes energy and lithium stocks. Some stocks in these sectors do not suit our preferred long-term investment horizon.

Companies in our portfolio that contributed strongly to returns through the half year were Commonwealth Bank, BHP, Westpac, CSL, and Wesfarmers.

As a long-term investor, in 10 years our portfolio returned a positive 9.4% per annum compared to a positive 10.2% per annum for the benchmark index. AFIC's performance returns are after costs. Importantly, we have achieved this performance with lower portfolio volatility than the market and more consistent dividend income.

Our portfolio is constructed for the long term

Our core portfolio holdings feature high-quality businesses that own unique assets, have a market leadership position, and can better protect their margins by being better able to pass on cost increases.

In the half year, we increased our holdings in BHP, Santos, Mirvac Group, Goodman Group, Seek, EQT Holdings, and Woolworths at attractive prices as these companies have strong long-term prospects. BHP will benefit from increased demand for iron ore as the China economy reopens. Santos predominantly produces LNG, a key transition fuel as the world moves to more renewable energy sources.

We recently added kitchen appliance company Breville Group to our portfolio. Breville exemplifies the characteristics we seek in the companies we invest in. The company has a heavy focus on product innovation and has very strong global distribution - factors that should provide further profit growth. Breville also has a long history of excellent financial discipline, delivering strong returns for shareholders.

We exited Orica and Reliance Worldwide as we believe the long-term prospects for these companies will be increasingly challenged as competition increases.

Our strategy remains appropriate

Consumer and business sentiment are subdued, and a persistent rise in costs is leading to higher operating expenditure for most companies. Interest rates are expected to continue to rise in the near term, although when and by how much is unclear. Consequently, the outlook for economic activity remains uncertain.

In this environment, we believe our strategy - owning a diversified portfolio of quality companies that are well positioned to deliver earnings growth over the medium to long term - remains appropriate.

The market may become volatile, but short-term periods of uncertainty often present good buying opportunities for investors such as AFIC, where we focus on the long-term prospects of companies to deliver earnings and dividend growth.