AFIC Earnings Call: Dividends Hold Amid Performance Strain

Australian Foundation Investment Co. Ltd. ((AU:AFI)) has held its Q2 earnings call. Read on for the main highlights of the call.

Australian Foundation Investment Co. (AFIC) struck a cautious but steady tone in its latest earnings call, balancing acknowledgement of short-term underperformance and stock-picking missteps with confidence in its long-term track record, low-cost structure and commitment to stable, fully franked dividends. Management was candid about recent portfolio setbacks and the persistent discount to net tangible assets (NTA), yet positioned recent capital management moves and portfolio adjustments as steps aimed at restoring relative performance and shareholder value over time.

Dividend Stability and Special Distributions

AFIC again leaned into its reputation as a reliable income vehicle, maintaining the interim ordinary dividend at $0.12 per share and declaring a $0.025 special dividend for the first half of FY2026, for a total H1 payout of $0.145 per share. Management also signalled an additional $0.025 special dividend is expected with the final result, underscoring confidence in the strength of franking and profit reserves despite a softer profit outcome. The company emphasised its long history of stable or growing fully franked dividends, reinforcing its appeal to yield-focused investors even as earnings and net asset performance have come under pressure in the near term.

Long-Term Track Record Remains Intact

While recent returns have lagged the market, AFIC highlighted its long-term record as a core part of its investment case. Management showcased a 30-year example in which $10,000 invested in AFIC in 1995 would have grown to $155,000 by 2025, compared with $136,000 for the broader market. This outperformance, delivered through a low-turnover, quality-compounder strategy, was presented as evidence that short-term volatility and cyclical missteps have historically been outweighed by disciplined, long-horizon investing in high-quality companies.

Ultra-Low Cost Structure Supports Returns

The group’s management expense ratio (MER) came in at an annualised 0.11%, consistent with its positioning as a low-cost listed investment company. AFIC pointed to scale benefits and tight cost control, with historical MERs of 0.10% in 2020 and 0.13% in 2022, as a structural advantage that helps preserve shareholder returns over time. Management did caution that the current figure is somewhat flattered by timing effects and non-vesting of incentives, suggesting the MER may normalise modestly higher, but remains firmly at the low end of the industry cost spectrum.

Capital Management: Buybacks and Enhancing Shareholder Returns

To tackle a persistent discount between its share price and underlying NTA, AFIC has introduced and continued on-market share buybacks, framing them as an accretive use of capital when the stock trades meaningfully below intrinsic value. The company is also stepping up marketing and investor outreach to better articulate its proposition to a broad base of around 150,000 shareholders. Strong franking and profit reserves have enabled the ongoing payment of special dividends, adding another lever to return capital to investors while the board seeks to narrow the gap between market price and asset backing.

Opportunistic Buying and Diversification in the Portfolio

Despite broader portfolio headwinds, AFIC used the recent market environment to add to high-quality income names such as Woolworths, Telstra and Sigma, reinforcing its core dividend-paying base. At the same time, the manager selectively increased exposure to technology and higher-growth small caps, including Macquarie Technology, Life360, Objective Corporation and Temple & Webster. These small-cap additions collectively represent only about 0.3% of the portfolio and are spread across multiple names, reflecting a cautious, diversified approach to capturing growth opportunities without materially shifting overall risk.

International Sleeve Incrementally Adding Value

AFIC’s international equities portfolio has grown from an initial US$100 million investment to about $170 million at 31 December 2025, now accounting for roughly 1.7% of the total portfolio. Holdings include global heavyweights such as NVIDIA, Microsoft, Netflix and Visa. Management said this concentrated international sleeve has added value and is intended to complement, rather than replace, the core domestic portfolio. The company plans to remain selective but is open to lifting international exposure further if compelling opportunities arise, providing an additional source of diversification and potential growth.

Scale, Core Holdings and Portfolio Construction

The portfolio stands at approximately $9.9 billion across 59 stocks, with NTA of $7.90 per share. AFIC’s top-25 holdings remain anchored in large, high-quality companies such as BHP, Rio Tinto, Woodside, the major banks, Transurban, Telstra, Goodman, ResMed and Fisher & Paykel Healthcare. Management reiterated that this concentration in dominant market leaders is designed to deliver a balance of income resilience and long-term capital growth. Portfolio transaction levels in the half were broadly in line with long-run averages, underscoring a disciplined, low-turnover approach rather than aggressive trading.

Liquidity, Funding and Dividend Support

The company reported that liquidity management remains conservative, aided by existing facilities and strong participation in its dividend reinvestment and share subscription plans. These mechanisms help smooth cash flows and support the payment of fully franked dividends, including specials, without undue strain on balance sheet flexibility. AFIC’s focus on maintaining robust funding and liquidity positions is framed as a key pillar supporting its long-term commitment to reliable income for shareholders.

Short-Term Underperformance Weighs on Returns

AFIC’s near-term performance was a clear weak spot in the call. NTA total return for the six months to December 2025 was -2%, and just +1.2% for the year, both materially below the ASX 200 Accumulation Index. This shortfall has dragged down the company’s 3-, 5- and 10-year numbers, tarnishing what has been a strong longer-term record. Management was forthright in recognising that recent relative performance has been “lower than desired” and that execution and stock selection have contributed to the gap, rather than simply broad market factors.

Profit Decline and Portfolio Value Contraction

For the half, AFIC reported profit of $147 million, down 4.6% year-on-year, equating to earnings per share of $0.117. Notably, the ordinary interim dividend of $0.12 slightly exceeded EPS for the period, highlighting the company’s willingness to use reserves to maintain payout stability. The reported portfolio value slipped from $10.4 billion at 31 December 2024 to $9.9 billion at the latest reporting date, reflecting both market moves and underperformance in several large holdings.

Deratings in Key Large Caps and Sector Misses

Several previously favoured large-cap positions were singled out as major performance detractors. CSL fell 37% over the calendar year, James Hardie dropped 38%, and CAR Group declined 13%, collectively putting a noticeable dent in AFIC’s returns. On top of stock-specific weakness, the company’s historic underweight to gold was costly as the sector rallied strongly: Evolution surged 170%, Northern Star gained 78% and Newmont rose 156% over the period. Management acknowledged that missing the gold rally was a significant relative performance headwind that compounded the impact of deratings in key blue chips.

Small and Mid-Cap Setbacks

AFIC also faced disappointments among some of its smaller and mid-cap exposures. Stocks such as Reece and ARB, previously viewed as strong compounders, encountered notable setbacks during 2025, while IDP Education, which AFIC bought into too early, failed to deliver as hoped. These stumbles further weighed on relative returns, highlighting that even a generally conservative portfolio is not immune to growth-stock volatility and timing risk in less liquid parts of the market.

Persistent NTA Discount and Market Perception

One of the most pressing shareholder concerns is the persistent discount of AFIC’s share price to its NTA, which sat at about 9% at the end of December 2025. Management framed this as part of a broader trend affecting listed investment companies but acknowledged it remains a material issue. In response, AFIC is using on-market buybacks to capture value for existing investors when the discount is wide and increasing marketing efforts to clarify its proposition. Nonetheless, there was an implicit recognition that rebuilding performance and market confidence will be critical to sustainably narrowing the discount.

Tax, Expenses and Execution Lessons

The period’s results were also shaped by a higher reported tax charge, driven by a less favourable mix of franked versus unfranked income and timing differences in deferred tax. The MER of 0.11% was described as artificially low due to timing of incentive expenses and is expected to normalise. Importantly, management did not shy away from admitting stock selection and execution missteps, including missed buying opportunities in resources and certain blue chips, and regretting the timing of sales such as Mineral Resources, which traded higher after AFIC reduced exposure. Some reductions or exits, including WiseTech and a trim in James Hardie, were attributed to governance and balance-sheet concerns, reflecting an ongoing focus on risk management even when it means crystallising short-term underperformance.

Forward Guidance and Strategic Outlook

Looking ahead, AFIC reiterated its commitment to a long-term, low-turnover investment approach anchored by stable to growing fully franked dividends and disciplined capital management. The board confirmed the H1 ordinary dividend of $0.12 and a $0.025 special, with a further $0.025 special expected at year-end, supported by reserves despite H1 profit of $147 million (down 4.6%) and softer NTA returns of -2% for six months and 1.2% for the year. The portfolio comprises 59 holdings worth $9.9 billion, with an international sleeve of $170 million across 27 stocks that may be expanded if compelling value emerges. Management signalled ongoing use of buybacks where appropriate, and a focus on tighter execution in trading decisions, including selective additions in income names like Woolworths, Telstra and Sigma and small-cap positions, alongside trims in names such as Wesfarmers, Netwealth and the banks. While no hard numerical performance targets were set, the overarching guidance is for gradual performance repair through disciplined stock selection, capital discipline and incremental diversification, rather than wholesale strategy change.

AFIC’s latest earnings call painted a picture of a mature, income-focused vehicle navigating a challenging patch without abandoning its core philosophy. The combination of resilient dividends, ultra-low fees and a still-strong long-term record continues to underpin the investment case, even as near-term returns, stock-specific missteps and a stubborn NTA discount weigh on sentiment. For investors, the key takeaway is a cautious but constructive outlook: management is owning its recent mistakes, acting to address the discount and refine execution, and betting that its long-term, quality-first approach will ultimately reassert itself in shareholder returns.