THE first-half profit of Australia's biggest and oldest listed investment company has surged more than 30 per cent as it recovers from the financial crisis.
Australian Foundation Investment Company said its December-half net profit of $122.1 million, up 30.6 per cent on the previous year, meant it no longer had to dip into cash reserves to pay dividends.
Throughout the financial storm, which battered the market in 2008 and 2009, the company maintained its dividend, while many other businesses slashed theirs.
AFIC managing director Ross Barker said this year's interim dividend of 8? a share, fully franked, was unchanged, despite the profit increase. This was because the company was recovering from losses suffered in the crisis, he said.
"In the last year we paid out more in dividends than we actually received. By increasing the profit this year, that's getting us back in the position we used to be, where the profit covers the dividend," Mr Barker said.
Shareholders will receive their dividend on February 25.
AFIC, which survived the Great Depression and World War II, manages a portfolio worth about $5 billion. Revenue from operating activities, excluding capital gains, was $115.4 million, up 22.7 per cent on the previous corresponding period.
Mr Barker said the resources boom had helped the company. "In the past six months we have seen a large increase in the resources sector of the market. We think that has had a pretty good run."
But he was cautious about the broader market, saying the company would keep its purse strings tight until the end of the profit reporting season.
"There has been a little bit of weakness in some parts of the economy, such as retail. Obviously consumer spending has slowed down quite a bit," he said. "We haven't been doing a lot of buying. We will be interested to go through this profit reporting season to see how the companies are faring."
Mr Barker remained confident about AFIC's biggest investments, which include Woolworths, Telstra and Wesfarmers.
Woolworths said this week it would post profit growth of 5-8 per cent this year, down from earlier guidance of 8-11 per cent.
"It's certainly the case that consumers are tightening their belts, so that is affecting their Big W and Dick Smith operations," Mr Barker said. "The other thing that is happening is the renewal of Coles is gathering pace, so there is a lot more competition now.
"Nevertheless, they have got this very interesting new development with their US partner Lowes in the homewares, home improvement sector, which will be happening soon. There will be interesting opportunities arising out of that."
Mr Barker was pleased Telstra would pay a dividend of 28? a share, a 10 per cent return. He said the telco's negotiations with the federal government on the national broadband network had knocked the company.
"But they seem to have negotiated a good deal over that," he said. "So we are looking forward to the prospect that, with the NBN deal behind them, the company will be able to focus its attention on renewing its ability to generate handsome returns from the assets they have, which are very good ones."
Frequently Asked Questions about this Article…
What drove AFIC's first-half profit surge and how large was the increase?
AFIC's December-half net profit rose to $122.1 million, up 30.6% year‑on‑year. Management said the recovery from the financial crisis and a strong run in the resources sector helped lift results.
Is AFIC paying a dividend this half and when will shareholders receive it?
Yes. AFIC declared an interim dividend unchanged at 8 cents a share, fully franked. Shareholders are scheduled to receive that dividend on February 25.
Does AFIC still need to use cash reserves to pay dividends?
No. With the stronger half-year profit, AFIC no longer needed to dip into cash reserves to fund dividends — the recent profit increase is helping restore the position where profit covers the dividend.
How large is AFIC's investment portfolio and what were its operating revenues?
AFIC manages a portfolio worth about $5 billion. Revenue from operating activities excluding capital gains was $115.4 million for the half, up 22.7% on the previous corresponding period.
How is AFIC viewing the broader market and will it be buying stocks now?
AFIC is cautious on the broader market. Management said they will keep purse strings tight until the end of the profit reporting season, noting weakness in parts of the economy such as retail and a slowdown in consumer spending, and that they haven't been doing a lot of buying.
Which major companies does AFIC hold and why are they significant to investors?
AFIC's biggest investments include Woolworths, Telstra and Wesfarmers. These holdings are significant because their performance (for example Woolworths’ revised profit growth guidance and Telstra’s dividend and NBN negotiations) can materially affect AFIC’s returns.
How have the resources boom and retail sector trends affected AFIC's performance?
The resources boom helped AFIC’s returns in the past six months, while weakness in retail and slower consumer spending have been a headwind. Management highlighted both the positive impact from resources and the challenges facing retail operators like Big W and Dick Smith.
What should everyday investors watch next regarding AFIC and its holdings?
Investors should watch the ongoing profit reporting season for clearer company earnings, developments around Woolworths’ profit outlook and Coles’ renewal/competition, and how Telstra performs now that its NBN negotiations appear resolved — all of which could influence AFIC’s future dividend coverage and buying activity.
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