Cash won't move AFIC on dividend

AFIC, the largest and oldest of the four listed investment companies that grew out of the house of JB Were, predictably suffered a fall in profit from traditional investment activities for the latest year as sharemarkets were roiled by a loss of confidence stemming from the billions of dollars lost investing in risky loans portfolios.

Where AFIC, and some of its stablemates, did do better was from the outworkings of the overheated market which generated major takeovers, such as Wesfarmers' swallowing of retailer Coles and building products group Rinker by Mexico's Cemex.

So, depending on where you rule off the after-tax profit result for AFIC this year, it either suffered an 8.6% fall to $205.1 million, or had a monster 60.5% profit gain to $416.1 million after banking all the capital gains from selling its shareholdings in companies taken over.

Managing director Ross Barker indicated yesterday the $5billion company preferred to focus on the lesser and more sustainable figure, because the capital gains are far less predictable given they require the right environment for acquisitions and that might mean a less attractive outcome this financial year.

However, in 2008-09, AFIC already has about 10% of its investment portfolio, or almost $500 million of stock, under takeover. Most of that is because its largest investment, BHP Billiton, is bidding for the second largest, Rio Tinto, which was worth $332 million at June 30.

The other big stakes are its $78 million in Origin Energy, subject to a $14 billion takeover from BG Group, and $69 million of St George Bank, for which Westpac is offering a share swap merger.

AFIC stablemate Djerri-warrh, which specialises in the Top 50 companies, also has close to 10% of its portfolio in those takeover targets, whereas the other two members of the quartet - Mirrabooka and AMCIL - have their investments elsewhere.

AFIC banked a barrowload of cash over the year, much of it from Rinker (but also from Coles and some lesser takeovers), and Mr Barker said much of the money arrived early in the financial year.

Investment markets were already being battered by then, and AFIC chose to hang back.

"I think we felt that with the market heading to record highs in November it was defying reality," he said, "So we weren't all that keen on buying stocks at high values."

As a result, AFIC had more than $260 million in cash by year's end and earned almost $12 million during the year from interest income. It also meant that Goldman Sachs JB Were's cash reserves fund, where the money is on deposit, had an extra quarter of a billion dollars to invest.

Mr Barker said AFIC had been nibbling at some stocks on the way down, and a few it hopes are on the way up, but is certainly not convinced a bottom has been reached.

So, with a significant cash buffer, the investment house is biding its time and has declared a steady final dividend of 13 a share, fully franked (payable August 25), bringing the annual payout to an unmoved 21 a share. Funds for the payout come from pre-tax listed investment company capital gains, which means that most Australian shareholders will be able to claim some of the dividend as a tax deduction.

By year's end AFIC had $97.2million of franking credits, effectively allowing it to pay another $227 million of fully franked dividends. Mr Barker said there were no plans at this stage to use the credits.

AFIC shares closed the day 1 better at $4.93 in a market that was down overall.