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Is the AFIC (ASX:AFI) share price a great long-term buy?

Could the Australian Foundation Investment Co.Ltd. (ASX: AFI) (AFIC) share price be a buy for the long-term?

The listed investment company (LIC), which has the job of investing in other shares for shareholders, is one of the oldest LICs. It has been investing since 1928.

Why is the AFIC share price worth considering?

One of the most effective ways to invest is to invest for the long-term, whilst building a diversified portfolio. Lots of investors choose to build their own portfolio. But it’s also possible to invest in something on the ASX which itself represents a diversified portfolio.

Essentially, it’s like choosing all the fruit and veg yourself for your shopping basket, or you can just buy a pre-made basket that already has all the fruit and veg in it – a lot simpler! This is what LICs and exchange-traded funds (ETFs) do – they represent already-made portfolios of shares/assets.

Costs

But there are also costs to the LICs/ETFs. Plenty of ETFs have lower costs than active fund managers. The question is – are you paying someone a lot of money to pick your fruit and veg? Or are the fees very reasonable? The one argument that fund managers can make to justify charging more is that they may be able to choose the best fruit and veg over a long period of time. In other words, they could be able to outperform the returns of the broader share market. But many fund managers don’t outperform, and charge more for it.

The great thing about AFIC is that it has very low costs, even though there are investors that are doing the picking. Its management cost is 0.14% per year, with no performance fees. That’s very close to the costs of Vanguard Australian Shares Index ETF (ASX: VAS).

Low costs are a key part of why AFIC is an effective way to invest in ASX shares.

Diversified portfolio

AFIC owns a portfolio of many of the ASX’s biggest companies including Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG), Wesfarmers Ltd (ASX: WES) and Transurban Group (ASX: TCL).

It’s a reasonably diverse portfolio, though the banks and materials make up a pretty large portion of the portfolio.

AFIC has also started investing in global shares, which has the benefit of increasing diversification and potentially offers more growth.

Dividends

AFIC has been remarkably consistent with its dividends to shareholders over the years. This is good for income security. The annual dividend is currently $0.24 per share. That’s a dividend yield of 4% including franking credits.

Why the AFIC share price may not be a great idea

For people in retirement, I think consistent income and a decent yield could be worth owning AFIC for. However, lots of the biggest positions in AFIC’s portfolio don’t offer compelling compound growth in my opinion. Banks and miners provide a lot of the return in the form of dividends.

The underlying earnings from the business holdings are predominately from Australia, so there’s less earnings diversification. If you think about businesses like Microsoft and Apple, those earnings come from across the world.

Finally, AFIC may not be great value.

At the end of January 2022, the before tax net tangible assets (NTA) per share was $7.16 (that’s the underlying value of the basket of shares) and the current AFIC share price is $8.55. Whilst prices are always changing, it appears the AFIC price is at least a double digit premium to its underlying value. It could be better value to buy an ETF, or another LIC at a discount to its NTA.

If you’re looking to learn how to do your own ASX company valuations, take our free share valuation course, which takes you through 6 common share valuation techniques, step by step.
Or try our Beginner Shares Course if you’re just starting out. Both are free.

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report — or get it emailed to you — for FREE by CLICKING HERE NOW or the button below.

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At the time of publishing, Jaz does not have a financial or commercial interest in any of the companies mentioned.
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