The Australian Foundation Investment Co Ltd (ASX: AFI) share price saw plenty of ups and downs in 2023. Is it time to buy AFIC shares?
What does AFIC do?
For those people who don’t know, AFIC is the largest and one of the oldest listed investment companies (LICs) on the ASX.
LICs are meant to invest in other assets, usually ASX shares, to help generate returns for investors.
Its biggest positions are in businesses like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), National Australia Bank Ltd (ASX: NAB), Wesfarmers Ltd (ASX: WES) and Macquarie Group Ltd (ASX: MQG).
AFIC aims to provide a growing stream of fully franked dividends and “enhancement of capital invested over the medium to long term”.
Reasons to like it
It has an extremely low management fee compared to many other active fund managers. The current management cost is 0.14%, which is taken out of the fund’s balance (investors don’t pay for it from their own bank accounts). Lower fees mean more of the returns stay in investors’ hands.
AFIC shares have delivered a very consistent dividend, providing good visibility and stability for shareholders that rely on that income.
Past performance is not a guarantee of future performance, but I’ll point out that over the five years to December 2023, AFIC’s net asset per share growth plus dividends (including franking) was an average of 12% per year, compared to 11.8% per year for the S&P/ASX 200 Accumulation Index (including franking).
Despite that outperformance, the AFIC share price has been trading at a discount to the AFIC net tangible assets (NTA) per share, which was $7.62 at December 2023. This means we can buy $1 of assets for less than $1.
Negatives
AFIC isn’t likely to achieve a lot of capital growth because of the nature of the businesses it’s invested in – names like BHP and ANZ Group Holdings Ltd (ASX: ANZ) are better known for their dividends.
Using the dividend re-investment plan can be useful, but receiving plenty of income may not be the best effective wealth-building method for working people with many years of full-time work (and life) ahead.
Finally, I’ll point out that AFIC’s portfolio is focused on ASX shares, which is only a small part of the global share market.
Final thoughts on AFIC shares
This actually seems to be a good time to invest because of the NTA discount and the ongoing commitment to dividends. I’d suggest it’s a better choice for retirees rather than younger adults though.
There are plenty of other ASX growth shares that may be able to deliver better capital growth.
