AFIC profits up - but a different story looms elsewhere

THE Australian Foundation Investment Company has warned of a tough reporting season ahead, with falling profits among major industrials likely to see dividends come under pressure.

By InvestSMART · 26 Jul 2011

By InvestSMART ·
26 Jul 2011

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THE Australian Foundation Investment Company has warned of a tough reporting season ahead, with falling profits among major industrials likely to see dividends come under pressure.

AFIC, which is Australia's largest listed fund manager, said the balance of risks over the next month would be more towards declining than increasing profits.

The comments by the managing director, Ross Barker, add to the generally cautious view of the reporting season which starts next week. Signs of a slowing economy and waning consumer confidence have led to analysts downgrading their earnings forecasts for companies outside the resources sector.

"We are not very optimistic for the outlook for dividends in the current reporting season, because in the industrial part of the market, many of those companies are finding life reasonably challenging," Mr Barker said.

"We're hopeful we can get more [dividends] from resource-related stocks where conditions are robust. In the industrial part of the market, times are tough," he said.

Mr Barker's comments came as AFIC reported a 27 per cent increase in net profit to $233.2 million for the year to June 30.

The main driver was the lift in dividends across stocks AFIC held, which were up 30 per cent over the past year. This was mostly helped by a rebound in bank stocks. Overall revenue for the company rose 27 per cent to $249 million.

AFIC declared a final dividend of 13? a share, taking total dividends to 21?, the same as last year.

The company prides itself on its deeply conservative investment strategy. The fund's $4.9 billion portfolio reads like a roll call of Australian blue-chip stocks, with a heavy emphasis on banks and big miners, including nearly $600 million of shares in BHP Billiton.

While investment markets remain volatile, Mr Barker said the underlying philosophy of the fund was to buy and hold good companies for the medium to long term, which gave shareholders a chance to benefit from franked dividends and capital growth.

Over the year, AFIC increased its holdings in AMP, mostly as a result of the fund manager's acquisition of Axa Asia Pacific.

Shares in AFIC closed 1.7 per cent lower at $4.46 yesterday.

AT A GLANCE

Revenue $249m 27%

Profit $233m 27%

EPS 23c 23.6%

Dividend 21? steady

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Frequently Asked Questions about this Article…

What were AFIC's latest financial results and dividend payout?

AFIC reported a 27% rise in net profit to $233.2 million for the year to June 30, with overall revenue up 27% to $249 million. Earnings per share were 23 cents (up about 23.6%). AFIC declared a final dividend of 13 cents a share, taking total dividends to 21 cents per share — unchanged from the prior year.

What drove AFIC's profit increase this year?

The main driver was a lift in dividend income from stocks AFIC holds, which rose about 30% over the year. That improvement was largely helped by a rebound in bank stocks held in the portfolio.

What did AFIC say about the upcoming reporting season and dividend outlook?

AFIC’s managing director Ross Barker warned of a tough reporting season ahead, saying the balance of risks was more towards declining than increasing profits. He wasn’t optimistic about dividends in the industrial part of the market and said many industrial companies are finding conditions challenging, though he was hopeful resource-related stocks could provide stronger dividend support.

How is AFIC's investment portfolio structured and which big holdings are mentioned?

AFIC describes its $4.9 billion portfolio as conservative and heavily weighted to Australian blue-chip stocks, with a strong emphasis on banks and large miners. The fund holds nearly $600 million of shares in BHP Billiton and aims to buy and hold good companies for medium to long-term capital growth and franked dividends.

Did AFIC change its holdings in any specific company recently?

Yes — AFIC increased its holdings in AMP over the year, mostly as a result of its fund manager’s acquisition of AXA Asia Pacific.

How did the market react to AFIC's results on the day they were released?

AFIC shares closed 1.7% lower at $4.46 the day after the results were reported.

What warnings for everyday investors come from AFIC’s commentary on dividends and earnings?

AFIC’s comments highlight risks that dividends outside the resources sector may come under pressure if industrial company profits fall. The article also notes analysts have downgraded earnings forecasts for non-resource companies amid signs of a slowing economy and weaker consumer confidence — factors everyday investors should watch during reporting season.

Is AFIC positioned as a defensive or growth-focused investment for ordinary investors?

AFIC positions itself as a deeply conservative, buy-and-hold fund focused on blue-chip Australian companies. Its strategy aims to provide shareholders with franked dividends and medium-to-long-term capital growth rather than aggressive short-term growth.