Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy?
AFIC is one of the oldest listed investment companies (LICs) on the ASX having operated since 1928. That's the type of longevity that can let you sleep easily at night.
One of the key attractions about AFIC is its very low management cost of 0.14% per annum, with no performance fees. You can't control how good your returns are, but you can pick shares that have very low management fees, helping your net returns be as high as possible.
Another of the pleasing factors about AFIC is that its annual ordinary dividend has been maintained or grown every year over the past two decades. If you can count on the same dividend payment each year then that can also help you sleep easy at night.
In-fact, investors will soon be getting a bonus 8 cents per share special dividend on top of the normal 10 cents per share dividend thanks to its participation in the Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) share buy-backs.
Extra money is always useful, particularly when it helps extract the franking credits which may soon not be as useful as before, if Labor push through their franking credit policy. Although I do wonder if, for long-term investors, the money would have been put to better use to buy more shares in ASX businesses instead of paid out.
AFIC's holdings are fairly similar to the ASX index, with its top five being Commonwealth Bank of Australia (ASX: CBA), BHP, Westpac Banking Corp (ASX: WBC), CSL Limited (ASX: CSL) and Transurban Group (ASX: TCL).
The problem is that many of Australia's blue chips, and AFIC's holdings, haven't been doing well recently.
AFIC's net asset per share growth plus dividends (including franking return) has only been 0.4% over the past year, compared to a 3% return for the S&P/ASX 200 Accumulation Index, including franking.
Over the past five years AFIC's return has been an average of 6.7% per year and the index's return has been 8.7% per year. Granted, AFIC's figures include its management fees, but that only accounts for around 0.14% per annum. It seems AFIC's investment decisions have worsened the performance against the index.
Foolish takeaway
If exchange-traded funds (ETFs) didn't exist then AFIC could be an excellent choice for reliable income with its steady grossed-up dividend yield of 5.4%.
However, with AFIC trading at a 10% premium to its pre-tax assets, it doesn't seem like good value when you could just buy Vanguard Australian Share ETF (ASX: VAS) at fair value.
