If the big four banks fail to repeat their great 2013 performance in 2014, then it will pay to know where the impact among the listed investment companies (LIC) will be hit.
Start with the country’s biggest LIC in Australian Foundation Investment Co (AFI), which revealed a modest rise in earnings for the December half year on Monday, as well as a return of 14.3% for the six months, just ahead of the 14% rise in the ASX 200.
Thanks to its huge holdings in the big four banks, plus stakes on Telstra (which did very well), retailers such as Wesfarmers and Woolworths and some smaller large cap stocks, AFIC lifted net profit 10.8% to $137 million, and will pay an unchanged dividend of 8c a share (which tells us something about the underlying strength of the result – OK but nothing to write home about).
Revenue from operating activities (excluding capital gains) was $150.4 million, up 11.8% from the previous corresponding period. This includes $11.0 million of demerger dividends received as a consequence of the Brambles/Recall and Amcor/Orora demergers
The after tax profit of $137 million included "gains for the half-year on certain investments in the investment portfolio that are defined as ‘puttable instruments’ or non-equity investments. The previous corresponding period included gains of $8.3 million (after tax) on the Company’s investment in Hastings Diversified Utilities Fund which was sold during the year ended 30 June 2013," AFIC said.
And once again, the company is very cautious about the strength of the market and the future direction, which isn’t a surprise given the way the banks’ share prices have remained solid.
CEO Ross Barker said investors keen for yield have flocked to income-rich shares such as the big banks, fuelling price rises to the point where many blue-chip companies are now highly expensive.
”Our general sense is that there’s quite a bit of money that could go into the sharemarket – but we are not seeing an environment that we want to spend money in at the present time,” he said.
AFIC said it had $160m in cash on its books at the end of the half, but was not looking to deploy that into new investments. ‘We’re not seeing a lot of value at the moment,” he said. Rather, he would most likely wait for large sell-offs before making a move. It’s not the first time AFIC has expressed such a high level of caution.
”Major bank holdings and other high-yielding stocks such as Telstra and Wesfarmers were the key contributors to the portfolio performance, along with the recovery in BHP Billiton and Rio Tinto shares prices over the half,” AFIC said in a statement.
AFI 1Y – AFIC’s overweight bank position
But details of the company’s holdings reveal just how its holdings of the big four banks have underpinned its performance in the past half year. The December 31 market values of the big four banks totalled $1.858 billion, up from the $1.695 billion at December 2012.
The big four banks represented 30% of the investment portfolio valued at $6.191 billion at December 31, down slightly from the 31% at the end of 2012 when the portfolio was valued at $5.360 billion.
The company didn’t add to its holdings of the big four – the Commonwealth, Westpac, NAB and ANZ – in the latest half year and rode the sharp rise in their value. The CBA holding was worth $660 million at December 31 last year, up from $528 million a year earlier, the Westpac holding was worth $590 million, up from $477 million, the NAB holding rose to $334 million from $260 million and the value of the company’s ANZ stake rose from $229 million to $273 million.
The 30% share of AFIC’s bank holdings of its portfolio is well above the 23% or so the quartet currently have in the overall market. That’s well overweight, which is fine in a rising market where the banks have been the big driver – as they have been since late 2012. But if the banks have an average or below par year, that will crimp AFIC’s returns.
Many brokers expect the banks to have a quieter year this year so far as revenue, earnings and dividend growth are concerned. As we pointed out yesterday, Goldman Sachs reckons the bank share prices are "fully stretched" at the moment, and obviously AFIC shares that view when it talked about the market being "fully valued" at the moment.
Other major holdings saw solid gains – the value of the company’s Telstra stake rose to $283 million from $235 million at the end of 2012, the BHP stake jumped to $569 million from $545 million, the Rio Tinto stake was up to $256 million from $237 million and the stake in Woolies jumped to $210 million from $183 million.
Like many Australian investors, AFIC is clearly dividend yield hunting. If ever that goes out of fashion (as it did briefly during the silly net and web boom of the late 1990s) then it will struggle, along with millions of self managed super investors.
AFI shares closed down 0.3% yesterday at $6.23. The wider market was off 11 points, after being down more than 25 points at one stage.
