Australian Foundation Investment Co (AFIC) is sending a big message to small investors – be wary of the big banks. Joining a senior fund manager from Perpetual in warning about the sustainability of the banks as big dividend generators, AFIC yesterday revealed that it was matching its words with action by selling down its stakes in the big banks.
AFIC is our biggest Listed Investment Company (LIC) and besides looking after its affairs, also manages the outriders, Mirrabooka, Amcil and Djerriwarrh Investments, each of which have produced slightly different changes in investment or dividend policy so far this reporting season.
AFIC management is worried that the big banks are no longer the growth stock idea they have been in recent years – the downside risks seem to now outweigh the upside benefits according to commentary yesterday by the company and CEO, Ross Barker.
For example, he told the Financial Review AFIC is shifting money out of banks, and other blue chip stocks to re-deploy into mid-cap stocks with better potential.
"I don’t think we can expect much dividend growth from the banks … and there is a risk of more cuts … so we have been reducing our exposure," Mr Barker said.
He highlighted four factors central to his view the banks are likely to find it tough to keep growing their dividends in the year ahead. Their dividend payout ratios are already historically high and economic growth is sluggish, hurting the corporate earnings outlook. There is ongoing pressure from regulators to lift their capital buffers, and the risk that a downturn in the property market could spark a rise in bad debts, which are currently at very low levels, he said.
And looking at the company’s $6.6 investment portfolio, AFIC has gone from overweight to underweight in the past year with the share of the portfolio devoted to banks dropping from 29% to around 23%, which means the company is now underweight the sector compared to the ASX 200.
Portfolio details released yesterday and comments in the annual financial results reveals the company has also been selling shares in BHP Billiton, Origin Energy, Woodside and Santos (understandable given the weak outlook for commodities, especially oil and gas). Shares in retailers, Woolworths and Wesfarmers have also been sold down, along with Telstra. The decision to quit Woolies came despite the big hardware write downs and clean up in February, and while Wesfarmers has been doing better, its non-retailing interests are now a drag on the company.
AFIC reported a full-year profit of $265.8 million, down from $293.6 million in the 2014-15 financial year. Last year’s figure included a special non-cash dividend of $31.9 million flowing from the demerger of South32 out of BHP Billiton.
AFIC maintained its final dividend of 14 cents a share, bringing total dividends for the 2015-16 financial year to 24 cents.
Of the blue chips in the ASX 20 list, AFIC likes CSL, Westfield and Brambles (All are exposed to the weaker Aussie dollar). But they are also exposed to a sluggish global economy.
Food related stocks are in favour – Freedom Foods, Aust Ag and Treasury Wine Estates (but no dairy), while some of the money liberated by selling down its Telstra stake has been reinvested in aggressive rivals such as TPG and Vocus. That was evident at the halfway mark in February.
Education group, Navitas is another recent favourite, along with REA Group, Mainline and Aconex. But remember these shares have already been purchased and groups like AFIC do not telegraph their buying (or selling) moves.
But the move to sell down and remain wary of the big banks is a timely one as we head towards the June 30 reporting season with the mighty CBA leading the way in around three weeks. Its performance and dividend policy will go some way to setting market sentiment towards the sector for the rest of the year. At the moment the scepticism from the likes of Perpetual and AFIC is dominant.
