Thank you. Good afternoon. I'm John Paterson, Chairman of Australian Foundation Investment Company, and I'd like to welcome you to this full year result briefing. I have joining me today on the webinar, Mark Freeman, the Chief Executive Officer and Managing Director, David Grace, a Portfolio Manager from the investment team, Nga Lucas from the investment team, Andrew Porter, our CFO, Matthew Rowe, our Company Secretary, and Geoff Driver, General Manager of Business Development. Before we start the presentation, a bit of housekeeping on the webinar.
This briefing is based on the material available on the company's website. If you're using your computer to access the presentation via the webcast, the slides will change automatically. If you're accessing by phone only, the PDF of the slides with page numbers is available on the website. I'd like to make a couple of short observations before I pass to our team for the presentation.
Given where we started early in the pandemic, this has been a surprisingly strong year in the market, up 29%, including franking credits. We're very pleased that we've beaten the index by 2.8% over one year when franking credits are included. Now our three, five, and 10-year records are also again ahead of the index. We're also pleased that alongside the significant capital gains delivered to our shareholders, we've been able to sustain our AUD 0.24 dividend, despite earning around AUD 0.16 before the special dividend from the Woolworths demerger. This reflects our ability to draw on a store of past realised gains and franking credits. I'd like to briefly touch on a number of board changes over the last four months. In April, Julie Fahey joined our board, bringing deep experience in technology areas, which had been a large part of her executive career.
She sits on the SEEK, IRESS and recently Phocuswright. At June 30 or so, Ross Barker retired after a long connection with AFIC since being appointed an alternate director in 1987. He was the key person involved in implementing the move of AFIC away from dependence on JBWere to stand independently on its own. Also, on the July 1st, Craig Drummond joined the board. He brings deep investment experience and has considerable senior management experience in financial services companies and has recently been the CEO of Medibank. The appointments broaden the skill and experience set of your board for the future. I'll now hand over to Mark and the team to run through the presentation. Thank you.
Thanks, John. Just moving to the slides. Just starting on slide two. Sorry, it's Mark Freeman speaking, the Managing Director. We've got our usual disclaimer just to state that we're here to talk about the company. We're not here to give advice. Just moving to slide three. We have an agenda. I'll give some overviews of the company. Andrew Porter, our CFO, will then talk about the financial year in summary. David Grace and Nga Lucas will talk a bit through the portfolio and the outlook. Then we'll move to questions. Moving on to slide four. I always like to reaffirm what AFIC is about. AFIC primarily invests in Australian, New Zealand companies. We're looking for quality businesses that we can invest in for the long term. It's the largest listed investment company on the ASX at over AUD 9 billion.
Around 160,000 shareholders, and our structure as an LIC means it's transparent, and we have an independent board of directors that provide strong governance. The shareholders own the management rights to the portfolio. There is no external funds management business deriving income from the company or the portfolio. This keeps the costs low to our shareholders who own the business. Management expense ratio is coming in at 0.14% with no performance fees. We're a long-term investor with a low turnover. We understand that tax can have a negative impact on shareholder returns, particularly compared to many other high turnover funds in the market. We have a long history of growing or stable fully franked dividends that we pay to shareholders. The investment team also manages three other funds, Djerriwarrh, Mirrabooka and AMCIL, which add significantly to the effectiveness of the investment process and idea generation.
The returns we also generate come at a very low volatility. When we look at the volatility of our returns against the index and indeed against our peers in the market, our volatility is extremely low. Just to reiterate, we run this company for the shareholders because the shareholders own the company. Moving to slide five. Just onto the investment objectives. The company aims to provide shareholders with attractive investment returns through access to a growing stream of franked dividends and growth in capital. In that regard, we want to increase our dividends over time at a faster rate than inflation and provide attractive total returns over the medium to longer term. I'll now pass to Andrew Porter to talk through our result.
Thank you, Mark Freeman, good afternoon, ladies and gentlemen. The next slide is the full year results summary. I'll quickly run through some of these highlights. The profit for the year, AUD 235 million. On first sight, to be down only 2.2%, that does include, as we made clear in the release yesterday, AUD 36.5 million of demerger dividend from the Woolworths and Endeavour Group demerger. I don't want to get overly technical on this, although happy to either in questions or at a later date. That dividend, we need to include for accounting standards. It includes no cash and no franking credits. Therefore, we don't really look at it in terms of our own dividend-paying capacity. If you were to exclude that, our profit was at AUD 198.6 million. Down 17% on the year, or equivalent to AUD 0.16 per share.
That is obviously a fall, but I think it's probably a better result than many would have anticipated at the beginning of the financial year. That figure excludes the realized gains that we've made on the portfolio during the year, which we will have to pay tax on. Coincidentally, that almost replaces that demerger dividend. If you add those AUD 0.03 on realized gains and profit for the year, we've made about AUD 0.19 per share. That brings us down to the dividend, AUD 0.24 per share for the year, final dividend AUD 0.14. That's consistent with prior years. As Mark explained in the release yesterday, we have had to dip into reserves, but that's what an LIC is for in order to be able to do that and hopefully smooth over the dividend in troubled times, as long as they don't go on forever.
The shareholder return, 35%, that includes franking and assumes reinvestment of the dividend. That is a tad, that's a technical term, above the portfolio return of 32% because the premium over the NTA slightly increased at the end of the year. As Mark has explained, we are a low-cost vehicle. The managed expense ratio, which is the expenses as a proportion of the total portfolio, 0.14%. What that means is AUD 0.14 for every AUD 100 that you had invested. It has creeped up a little bit for the year. A lot of that is to do with a number of things, but as I said, a lot of it to do with the starting to have a look at the international investments that we've talked about, and John, as Chairman, had mentioned at the AGM last year. As Mark mentioned, portfolio now over AUD 9 billion.
That's as at the end of June. That's it for me. Happy to take any questions on any of that in more detail later on. I'll hand over to the portfolio manager, David Grace.
Thank you, Andrew. Moving on to slide seven. We endeavour to hold a diversified portfolio of companies we consider to be high quality. Ideally, we want companies that have a strong industry position, holding unique assets with a definable competitive advantage. These companies are best positioned to generate meaningful cash flow through the full investment cycle. We want our companies to be run by strong management teams and boards, have recurring predictable earnings, and to maintain a strong balance sheet. We want our investments to deliver earnings growth, and we undertake detailed analysis of the future growth prospects for all our investments, how well the company is positioned to capture this growth, and ensuring they have a supportive balance sheet able to fund the opportunity in front of them.
We aim to keep portfolio turnover low, which aligns with our long-term investment horizon as we look to capture the benefit of compounding returns that quality companies tend to deliver. Onto slide eight. For early-stage companies where we recognize they are developing our preferred attributes, we aim to make an early-stage investment or nursery stocks as we define them. While initially only small, the growth potential in these businesses remains large. Importantly, and consistent with our long-term investment approach, we only look to buy where we perceive the share price represents good long-term value. We're happy to be patient, waiting for the opportunity to emerge in our preferred companies. Moving on to slide nine, which outlines the recent performance of the market. The chart on the left-hand side shows the performance of the ASX 200 over the last five years.
It gives great context to the extent of the market pullback as COVID emerged, encouragingly, the strong market rebound post the initial COVID shock to now being above prior levels. While COVID is still with us, as investors, we need to use periods of share market volatility to buy quality companies at attractive prices. The market is always forward-looking and prepared to look through short-term weakness, particularly for high-quality companies that have strong growth prospects. Having increased our buying activity during the dip, we are now more cautious, which we'll talk to in our outlook statement later on. The chart on the right-hand side shows the strong sector performance over the last 12 months, led by the banks, being the orange line, and just below that, the technology sector, the gray line.
Around 8% of the portfolio is currently invested in technology companies, led by holdings in realestate.com, SEEK, Carsales, Iress, and Xero. We consider all these companies continue to have significant long-term growth opportunities. Banks have rallied more than 50% in the last 12 months as the impact from COVID proved to be less severe than originally expected. The result is that all banks now have excess capital. The CEOs of all four of the major banks have spoken about potential capital management, either increasing dividends or some form of share buybacks, with ANZ announcing a buyback last week. Timing and quantity for the other three majors remains unknown. Following strong performance last year, the valuations of the banks are now more in line with long-term averages. Returns from here will likely be more about income.
Resource companies have also had a strong last 12 months. We have large holdings in both BHP and Rio Tinto, with both offering a diversified commodity exposure operating low-cost tier I assets. With market conditions remaining positive, both companies are expected to deliver strong dividends in the near term. Onto slide 10. Following a very difficult FY 2020, the 12 months ended June 2021 has been really positive in equity markets. Market conditions of lower interest rates and rising corporate earnings provided perfect conditions for a rise in share market. Including franking, the market rose 29.1%, delivering consistent performance with 11 of 12 months delivering positive returns. Also including franking, the portfolio delivered a return of 31.9%, being 2.8% ahead of the ASX 200. The strong performance reflects the benefit of holding a diversified portfolio with a mix of high-quality companies, together with a number of businesses benefiting from economies reopening.
It's also pleasing to see longer term performance exceeding market returns with both the five and 10-year performance now above the S&P/ASX 200. While the market is always presented with challenges, the key concern or unknown for the market today is rising cost inflation and supply chain disruption. We think about inflation and its potential impacts on markets in two ways. Firstly, cost inflation leading to a higher cost of business for companies as raw materials, labor, and supply chain costs increase, and secondly, the potential for a change in stance in monetary policy and the end of the rate easing cycle. The flow and effect of this is likely lower equity valuations. In relation to the first point, a key attribute we look for in selecting companies we invest in is finding those that offer a sustainable competitive advantage.
While never immune to rising costs, these companies are best positioned to have pricing power, the greatest ability to pass through cost inflation via price rises to their customers. Should rates begin to firm, share markets are likely to be more volatile, which may present the opportunity to purchase high-quality companies at attractive valuations. We know the companies we want to own more of, We have recently been increasing our cash balance, We're positioned to buy if attractive prices eventuate. Overall, we feel comfortable with our portfolio positioning today, having significantly increased our capital allocation to what we believe are high-quality companies over the last few years. Moving on to slide 11. The chart on this slide reflects data from a Mercer survey of 115 large cap Australian equity fund managers, displaying their risk and return metrics over the last three years.
The green lines represent the median manager, who has delivered a return of 8.8% per annum, with a standard deviation of 18.2%. The standard deviation is a measure of risk or the volatility of a portfolio. The AFIC portfolio is represented by the blue dot and has returned 10.5% per annum, while the ASX 200, being represented by the purple dot, returned 9.6% per annum over the period. Notably, AFIC's standard deviation of 16% is well below the risk of the market and the median fund manager. In simple words, the chart indicates the AFIC portfolio has delivered a higher return with less volatility. We believe these metrics reflect the higher quality of the holdings in the AFIC portfolio while maintaining a diversified exposure across the various market segments. Moving on to slide 12, which outlines the largest contributors and detractors to performance over the last 12 months.
All of the largest contributors are run by strong management teams and boards, all have strong market positions in their core markets, and all have supportive balance sheets able to internally fund growth opportunities for their businesses. Reece Group is 70% owned by the Wilson family, who were first involved with the company 50 years ago, with second generation Peter Wilson, the current CEO. The business has clear market leadership in plumbing suppliers in Australia and New Zealand. The company's investment in technology has been a meaningful growth driver, improving the experience and speed with which plumbers can source materials. three years ago, Reece expanded into the U.S. market and has been developing an understanding of the local challenges and opportunities. We believe Reece has significant long-term growth opportunities in both Australia and the U.S..
James Hardie is the leading manufacturer and distributor of high-quality fiber cement siding products for the U.S. housing market, with the company holding 90% market share of the segment. The company has consistently been increasing market share with a strategy centered around deep knowledge of its customer. Market trends remain favorable as long-term labor and environmental issues favor lightweight building materials like fiber cement away from traditional brick and concrete. The business has a strong balance sheet and is run by a strong management team and board. ALS is a lab testing business, analyzing and testing samples from commodities through to food, pharmaceutical, and environmental. The company has a global footprint operating in more than 65 countries. With the need for compliance increasing, ALS as one of the market leaders, is well-positioned to capture the growing demand for sample testing.
Mainfreight is a logistics operator that has a strong track record in both New Zealand and Australia. They specialize in less than a container load of freight with a focus on food and beverage, DIY hardware, and healthcare products. The company has in recent years also expanded into the European and U.S. markets. We regard the management team highly, and we value the opportunity to co-invest with the founder of the business, who remains the chairman today and still holds a meaningful share of the company. ARB is a market leader in manufacturing and distributing four-wheel drive parts and accessories globally. The business was founded in 1975 by the Brown family, with Andrew Brown and Roger Brown still running the company today. The company distributes products in over 100 countries and has recently signed an agreement with Ford U.S.A. to provide equipment to their new four-wheel drive range.
Management has done an excellent job. The business still has significant opportunity to grow over the long term. Over to the right-hand side of the slide, we have listed the main detractors of performance over the last 12 months. I'll talk about Afterpay, and David will touch on Fortescue and Transurban. Afterpay has been an incredible performer this year, rising almost 100% over the period. The business pioneered the buy now, pay later sector and has consolidated its first mover advantage by rapidly growing its network of customers and merchants in Australia. More recently, they have expanded into the U.S., U.K., and European markets. The product resonates strongly with its target consumers, and retailers view the platform as an effective way to attract new customers. We've been watching the company for some time and will continue to monitor its progress.
While many of our questions around the business model have been answered, we still remain concerned about the sustainability of the company's competitive advantage, particularly as their success has now attracted some very large global competitors.
Fortescue is a pure play Australian iron ore producer who has benefited from the strong run in the iron ore price over the last 12 months. The business has been extremely well run under CEO Elizabeth Gaines, consistently growing iron ore production while lowering costs. While we missed the opportunity last year, not forecasting the strength in the iron ore price, we feel comfortable at this point in the cycle that the majority of gains are likely to have been made, as we don't consider an iron ore price above AUD 200 to be sustainable long term. As mentioned earlier, over our long-term investment horizon, we remain comfortable with our exposure to tier I diversified miners BHP and Rio Tinto. Transurban holds a portfolio of strategic road transport assets along the eastern seaboard of Australia and within the U.S..
Business underperformed last year, as reduced mobility during COVID led to lower traffic volumes. We used the short-term share price weakness to increase our holding. Traffic volumes are showing continual improvement as economies gradually reopen, with the company's balance sheet remaining in strong shape. Moving on to slide 13, which outlines the major portfolio changes over the last 12 months. All the purchases shown on the left-hand side are of companies with strong industry positions in their core markets. As outlined earlier, for some of the earlier stage companies like Temple & Webster, Nanosonics, and FINEOS, where the market opportunity is significant, the range of potential outcomes is wider than, say, for Woolworths and ASX. For these earlier stage companies, we invest a small initial holding and look to increase our weighting as confidence levels increase.
Short-term share price weakness gave us the opportunity to materially add to our holdings in Woolworths and ASX. Both have been long-term holdings in the portfolio, and both have market leadership positions with strong long-term growth prospects. Nanosonics is a leading manufacturer in the healthcare industry of ultrasound disinfection products. The company has developed a leadership position in the U.S. market and is expanding globally with the potential to increase penetration as it broadens its product offering.
PEXA is a recent portfolio addition, having listed on the ASX only this month. It is Australia's leading cloud-based property settlements platform, with over 80% market share. Their long growth runway is underpinned by their dominant position in Australia, and we believe they are well-placed to replicate this success in the U.K. Domino's Pizza holds a strong market position in Australia, but it's the long-term opportunity in the European and Japan markets that have attracted us to this company. The business is exceptionally well managed, and we believe that there is still a huge growth opportunity in the under-penetrated European and Japanese markets. Temple & Webster is a pure online furniture retailer utilizing a very capital-efficient drop-ship model. The company has developed a dominant market position in an industry that is still in the early stages of shifting online. Encouragingly, the business is already profitable despite its rapid growth.
FINEOS is a leading software provider that services the life, accident, and health insurance sector. The global opportunity for FINEOS is large as the insurance sector shifts from legacy systems to modern cloud-based operating systems. The company has a strong balance sheet and continues to invest in their product and technology well ahead of their competitors.
On the sales side, we exited our positions in both resource companies South32 and Alumina following a strong run in underlying commodity prices. We additionally exited our holding in Brickworks as the share price ran up strongly, supported by government stimulus efforts to the housing market. Moving on to slide 14. Slides 14- 16 outline the top 30 holdings in the portfolio. Nga and I will talk to a few of these companies we consider topical today, either due to current operating challenges, progress on business turnarounds, or recent M&A activity. On slide 14, CSL is the third largest holding in the portfolio. The company is the market leader and lowest cost producer of collecting plasma donations to produce life-saving biotherapies. While demand for CSL's therapies remains strong, reduced donor mobility during COVID has led to a growing shortage of plasma supply.
We believe the current tight supply issues will prove temporary. CSL, as a market leader with the lowest cost base, stands well-placed to benefit from any normalization in plasma volumes. Increasing donor mobility as vaccinations are progressively rolled out should result in improved earnings growth for CSL. Moving on to slide 15. Sydney Airport is a fantastic strategic infrastructure asset which has faced significant challenges in recent times as a result of travel restrictions. The company has recently received a takeover offer, which highlights the benefit to shareholders of holding strategic assets and taking a long-term view. While it is too early to determine how the potential takeover plays out, we recognize the excellent long-term prospects for these gateway assets to Australia's most populous city.
Telstra is Australia's leading telecommunications company with extensive telco infrastructure assets. After a period of earnings pressure driven by mobile competition and the migration of its fixed-line business onto the NBN, we believe the company has reached an inflection point in earnings, where they can now sustain and grow its AUD 0.16 per share dividend. This will be driven by a return to growth in mobile and cost out initiatives. Telstra recently also announced the sale of 49% of their mobile tower assets at a very attractive price. The proceeds will be used to pay down debt and buy back shares. Over the page to slide 16. Carsales is Australia's leading online automotive classifieds business. They also operate similar businesses in South Korea and Latin America that are growing strongly. We're excited by the growth opportunities in these international markets.
The company recently also announced the acquisition of a 49% stake in Trader Interactive, a U.S.-based online non-automotive business that has dominant market positions in RV and powersports. We believe the Carsales management team will be able to leverage their experience and IP to drive this business forward as they have done so in previous overseas acquisitions. I'll now hand back to David Grace for some outlook comments.
Moving on to slide 17. We feel positive about the holdings in the portfolio, but our sense is markets may prove more volatile in the near term than what we have experienced in the last 12 months. This reflects the uncertainty around the ongoing pandemic, rising supply chain disruption and costs, and whether inflation proves transitory or more long-term. There are always macro challenges for share markets, and today's issues are not necessarily any more pronounced. We feel comfortable that the core of the portfolio is investing in high-quality companies holding strong industry positions, where long-term prospects remain attractive. We've recently increased our cash balance and will look to purchase our preferred companies should attractive share prices present. At this point, that concludes the presentation. I'll hand over to Geoff to coordinate the Q&A.
Thanks, David. Just a reminder to ask a question on the phone, press star one, and also you can obviously ask a question via the webinar. There's a question tab at the top right-hand corner of the webcast window if you want to ask a question online. We'll just go to a few online questions first and then we'll head back to the phone and then see where we head after that. I will start with one that's more about the market in general in terms of when so much of the economy has been, I guess, decimated in the last year, why do we think the ASX could justify being at all-time highs?
Is it because only small businesses really suffered through COVID-19 and large companies have, I guess, been the benefit of some of the stimulus that's occurred, both from government and also from monetary policy?
Okay. Thanks, Geoff. It's Mark Freeman here. It is one of our observations that it's an unfortunate, a very unfortunate situation we're in here, particularly that the worst companies that have been impacted by this environment are smaller businesses, a lot of mom and dad or SME type companies, your restaurants, small travel businesses, entertainment companies, they've been hit the hardest. We've pointed out that a lot of the companies in our portfolio are really international businesses. If you look across our healthcare sector stocks like ResMed, Fisher and Paykel, CSL, or David talked about the Rio BHP. Some of these companies are actually performing pretty well in this environment. It is an observation that the companies listed on the share market are probably doing better than the small companies in the economy. I think we were pointing out, though, that we are expecting further volatility.
Another factor around that going forward is the fact that we are on high valuations. As many people on this call would remember back in March, we did a shareholder briefing, and we highlighted at that point when the market was down 30% that looking at long-term market factors such as price to sales and price to book, the market was looking very low by historical standards. We also have a chart there showing every time there's been a significant pullback like the one we've been in, it was inevitably a buying opportunity. Well, that's completely reversed now. Factors like price to sales and price to book are now at very high levels. That's leading into our caution on where we set the market at this point.
Thanks, Mark. A question about Qube, specific on why did we sell or what's our thoughts about Qube as an investment?
We have reduced our holding during the period. It was really around a change in the investment case. A large part of our reason for holding that business was the investment that Qube was making in developing Moorebank in suburban Sydney, and now having sold that asset, they've realized an attractive price. Our sense is the risk profile is heightened with the remaining business, which is really around logistics and ports. We feel comfortable that they do own strategic assets going forward, but a large part of our investment case was around Moorebank. It is no longer part of the story for the business.
Thanks, David. A question about the international LIC, Mark, just a potential timeline if that's what's going to happen? You might actually give a broader comment about our expectations there and what we see sort of going in the future with that particular issue.
Yeah. Well, thanks, chair. It's obviously very early days on this and there's a lot to play out, but certainly we'd be wanting to see another 12 months of how we go with having real money in the stocks. We think actually having some of these businesses will actually benefit the portfolio because they are very high-quality companies. Again, touching on the point I made earlier, a lot of our businesses are international companies, and I think it does benefit the team to have that broader perspective on the world as seen through the eyes of some of the companies that we've actually now bought into the portfolio. There's lots of positive benefits for the group overall. As I said, track record's really important.
The key thing we're looking to do with it, though, is apply the same frameworks that we apply to analyzing our companies in an international sense. That's what we need to be able to do if we were to develop this into a product. We are taking the same approach to investing, that we will be international and some of the things that we look for are businesses that have strategic assets, strong market position, strong competitive advantage. We'd like to get some of the owner-driver companies that we talk about. We've got a skill set in that. Good quality growth companies. The same sort of things that we talk about. We need some time with it.
I guess just a silly question to that, how big do you think it would be in the portfolio?
Well, look, at this point, we've got board approval to do just over 1% of the portfolio. It's quite small in that sense. Even having 1% or 1%-1.5% in a portfolio of high-quality global businesses, I think can be a benefit to the overall portfolio. We haven't invested all the money yet. We're just waiting. It's a bit like the views we had there. We're a bit cautious on valuation. If we see some weakness in global markets, we'll look to put some more money in.
A question on, well, it's an interesting one. A question on stagflation or potential inflation, in terms of the impact on the portfolio. David, would you like to make some comments around that?
Sure. Really, difficult for us to predict the rate or the level of inflation going forward. As equity investors, the way we're really viewing that is through two angles, if you like. The first of those is just having ownership of businesses that have pricing power or strong industry positions and their ability to be able to offset any cost increase. We really feel we do have a number of those companies in the portfolio currently. The second part to inflation is if we do see any change in policy stance from central banks and a move away from the easing cycle, that will lead to, or we expect it to lead to increased volatility within share markets. Our view of that would be if we see volatility emerge and we see attractive share prices, we look to increase our holdings in our preferred holdings.
Thanks, David. There's a collection of questions here about how we assess companies both in terms of environmental and other ESG factors, the impact of climate change, and how we look at that in the context of how we're managing the portfolio. Mark or David, would you like to give some comments around that?
Yeah, well, look, ESG has really been embedded in our process, assessing stocks ever since I've been involved. As a long-term investor, we want businesses that are going to be around for the long term. We want businesses that don't have structural headwinds on their business. We're not a trader. When we're thinking about that, and we have a system of ranking the quality, and sustainability of a business is one of the key factors we think about. If we think a business has challenges because of environmental issues, that comes into our assessment of the companies. Governance issues, I mean, I got taught on the first day I joined here, look at the people, look to see who's on the board. Governance has been a big part of what we consider in assessing a company. Social issues, we've always had it.
We've talked about that we don't invest in pure play gambling stocks, and that's a social issue that we consider. We consider ESG factors, but they're embedded in the way we look at and assess companies.
I suppose specifically around BHP and Rio, well, particularly BHP's interest in oil and gas. How does that factor into that sort of process as well?
Yeah. Well, I think the companies themselves are really thinking through that issue and where they take that going forward. I mean, the pure play oil and gas stocks, we have Oil Search, Woodside and Origin now, it's less than 2% of the portfolio in those three companies. It's actually reduced over time. We have done quite a bit of internal research on, I guess, our thinking on the future. It's probably fair to say we're cautious on the sector still from here on a long-term basis. We're not rushing to exit our balance of holdings because the sector has been under a fair bit of pressure recently. I think our reasonable expectation is that they'll probably become a smaller part of the portfolios over the long term rather than bigger.
Thanks, Mark. We might throw to some telephone questions now, Miles, if you've got some there?
Yeah, certainly. We sure do. The first question I've got on the line comes from the line of Paul Gustafson. I'll go to you, Paul.
Oh, good day, Mark. We miss you not having a physical visit to Queensland. You would be aware that AFIC finished at an all-time high today. That's mutually exclusive to my question. I'm old enough and wise enough now, from 1991 when I first became a shareholder, to remember one of your policy objectives was to have parity with your dividends, because that can be equated by AUD 10.10. This year was AUD 10.14. Is that still a medium to long-term objective of AFIC?
I think, just to reiterate the questions about the balance between interim and the final dividend. It's something we're definitely conscious of. We have these discussions internally. Obviously, there's always going to be a little bit of a bias towards the final, because you don't know how the year actually finishes off until you close off the books at the end of the year. It's not something we're looking to keep tilting in the way of the final. I think adjustments to the dividends, once we get through this period, I don't think we'd want them any more tilted than what we're seeing them at the moment.
Thank you. I sort of note your point with that.
Okay. We've got another telephone question, though. Yeah. I'll next go to Steven Mayne, a private investor. Steven, please ask your question.
Good afternoon, everyone. Thanks for an interesting presentation. Two questions. The first is, what are we going to do with Endeavour Group? We've got out unwritten policy of not owning pure-play gambling stocks, as you've mentioned and w henever Woolworths was mentioned in the past, the comment was always made that poker machines were a small part of the business. Now, Endeavour has got 12,500 poker machines almost and takes about AUD 1.5 billion from gamblers, Australia's biggest poker machine operator. Are you going to apply an ESG lens to that investment and dispose of that, so with zero weighting like with Crown, Star, and Tabcorp, or are you looking to retain that? Also, what do you make of the Milton Soul Patts merger? Is there any implications for AFIC from that? It seems a strange deal to take out our second biggest competitor in the pure LIC space.
Has anyone ever proposed a similar merger with us?
No.
That's a big no.
Just on Endeavour, that was obviously spun out about one month ago from Woolworths as a standalone investment now. We have actually reduced our holdings since it has been a standalone company, and it's not a business that we see long-term for the challenges around the poker machines, as you mentioned.
Just on Milton and Soul Patts. Obviously they've taken a view on that probably scale is important, I guess. You're getting a larger, more consolidated business. I guess that's what they have chosen to do. If you want to understand that strategy, I guess you can ask them that question, but we don't have any objective to take over other LICs. We've had this question in the press too, because obviously there's a little bit of activity going on in this sector, but we're pretty comfortable with the four companies we're running. The reasons for having those four, I think, are pretty clear. We just need to keep focused on what we're trying to do, which is find great companies to invest in for our shareholders rather than worrying about taking over LICs.
Thank you.
Okay. There are no further telephone questions at this stage. I might hand back to you, Mark. I've still got quite a few on the webinar, we'll get through some of these as well. Now, one of the questions coming through is about looking at the top holdings we've seen light on in tech stocks. Given the current buyer opportunity, is there a plan to increase tech stocks given the recent advances in tech stock performance in the last 12-24 months?
Thanks, Geoff. As David highlighted earlier on, we own a bunch of technology companies, including REA, Carsales, SEEK, and Xero. We're also seeing a number of businesses come through the nursery in the tech area. That's a fast-moving sector, and we are assessing these companies as they come through. As time passes, I'd imagine we will be owning a larger proportion of tech-based businesses as that's the way businesses are evolving going forward.
Thanks, Nga. One of the questions coming through, David, is I think we did talk about some of the stocks that did underperform in the portfolio, but what are we seeing about those non-performing stocks in the portfolio? What were your comments around that and the reasons for that?
Yeah. Thanks, Geoff. The biggest underperformers in the portfolio have really been those sectors or stocks that have been impacted by the rolling lockdown. It's really companies within the travel space, and in that area, we hold Auckland Airport and Sydney Airport, and also the energy companies, which Mark touched on earlier, which are really leveraged to mobility within economies. It's interesting, in both those sectors, really our ownership of those assets is really about strategic assets that we think hold good long-term value.
Interesting, the recent little while that we've seen a bid for Sydney Airport as well as the potential Santos Oil Search merger. What's encouraging for us is if the equity market doesn't realize the full value of these companies, then someone else will.
Thanks, David. A couple of questions around dividends. The question about what we're thinking we might pay next year, which clearly we mightn't. We might talk about what goes into owning up the dividend, Andrew, and how we consider that. The other question was around in the context of the DRP discount that we provided, how did we come to the AUD 0.035? Another question around dividends is, have we ever thought about paying quarterly dividends?
Starting with the first question, what goes into the discussion, and it's a board decision that they take each time, would be looking at what's been paid before, what we are currently earning, and that's the profit figure and the level of realized gains that we've had. The last element is what do we expect earnings to be in the short, and particularly the medium term? Those are all of the ingredients that go into the dividend recipe, I would say. It's looked at each time, but we're very conscious, and John, the board is very conscious of the importance of dividends to shareholders. With regard to the second question on the DRP discount.
Do you want me to?
Yeah. No, thank you.
It's one of these things that we take advice from the executives, but it's a board decision. We tend to start with looking at where the share price is trading relative to the asset backing, and at the moment, it's trading at quite a strong premium there. We try to set a position which is fair to the people who are participating in the DRP, in that we try not to have them paying too much over the NTA, but also the people who aren't participating, that we don't end up in a situation where they're being diluted. The discussion this time around was it was going to be somewhere between 2.5% and 5%, and we felt the appropriate spot was broadly pretty close to the center of that range.
I'd also note that history tends to show that when AFIC, and past performance is no guarantee of future performance, as we often say. In the past, what has often happened is when the stock goes ex-dividend, the stock price falls by more than the dividend, normally the dividend and the franking credit. We'll have to take that into account. Don't forget, we set that DRP price in the period that the stock goes ex, so not the current price. With regard to the quarterly one, it's something we have discussed before. It's a question of expectation. There is a cost involved in paying out a dividend. We'd have to look at all of those things in tandem.
I'd never say never, but at the moment, it's not something I think we'll be rushing in to do, but certainly understand people's concerns about certainty of cash flow, particularly in these times.
I've got a question, Andrew, associated with this, given the investment in some of the international stocks, how will it impact the availability of franking for us in terms of the portfolio?
The investment would be obviously 0.5% of the portfolio at the moment. Really very small. These stocks do tend to be lower yielding, so you wouldn't be getting as much dividend. Don't forget, we do have to pay tax on the dividend income that we do receive from those stocks. We will get a credit for any withholding tax, but despite COVID, there are still a few countries that have got a tax rate as high as 30% here. Of course, there will be capital gains tax that we need to pay on any disposals from that portfolio. At the moment, at this level and even at future levels going up to the levels that we're envisaging, it will be a very small part of the portfolio and wouldn't have much impact on AFIC as a whole.
Thanks, Andrew. Comment around Sydney Airport and potential acquisition. David?
Early days at this stage. Clearly, the bid has come through at a price of AUD 8.25. Our own view around that is we think that this is a fantastic strategic asset that still represents very good long-term value, and no doubt travel will return. We're not sure of the timing of that, but our expectation is certainly on the leisure side that we'll see travel return to where it was, maybe less so on the business side. We're supportive of the company or the board stance to reject the first bid that has come through, sensing that that's opportunistic at a time when travel has been particularly challenged.
Now a question back on the technology stocks. I'm going to throw these all to you. Comment around Xero. Why do we hold Xero given that Xero is obviously used quite extensively through small business, and they're the ones that have suffered the most, I guess, through the slowdown in terms of the pandemic?
Thanks, Geoff. Just on Xero, they tend to be larger, small businesses that use accounting software. In terms of exposure, the companies are a bit more resilient. JobKeeper has certainly helped, and there's an equivalent, obviously, in the U.K., which is their other major growth market. Interestingly, small business formation accelerates out of a downturn, so they should benefit from that as we emerge out of COVID. Finally, Xero has continued to grow quite strongly, driving penetration of cloud accounting, so that is a real tailwind for the business.
Thanks, Nga. A couple of questions come through about investing in, I guess, sustainable energy productions, those minerals that are used in sustainable or renewable energy or generation of renewable energy. Looking at the opportunities, what do you see there in terms of potential opportunities around lithium, nickel, and copper?
Difficult when you think about our investment time horizon really being a long-term investor and looking out over 10 years. Our focus really is for tier I low costs operating mines. It's really difficult in the lithium space to invest in companies that meet that criteria. While our expectation is that demand will remain strong as demand for electric vehicles increases, it's really difficult with our investment focus to be able to get exposure to that into the portfolio.
Thanks, David. There's also a question around Brambles. What are our thoughts around Brambles?
Yeah, so.
Also, I'll ask a question about ASX as well, the content not the same. The question around ASX is why don't we hold more given its strong position in the market?
Sure. On Brambles, look, it's been a long-term holding within the portfolio. We see the business set to deliver reasonable growth. It'll be low single-digit growth is our expectation for that company. There are some inflation challenges for them at the moment within the U.S. market. Whether or not they're able to pass them on to their end customers will be the challenge going forward. We do like the management team. Their strategy is very focused on trying to reduce costs and to improve margins and cash flow out of that business. Brambles remains a holding in the portfolio. ASX, similarly, we're expecting low single-digit growth from that business. We materially increased our holding throughout the year when the share price fell to around AUD 70, and we're very confident long-term holders of that business going forward.
Thanks, David. This one's an interesting one. I guess it's a comparison of AFIC versus Djerriwarrh, which is one of the other companies in which we operate, or which we do operate, I should say. How is the performance different, I should say? How has that been determined? AFIC's probably done a bit better than Djerriwarrh over the last few years, particularly in terms of portfolio growth and share price growth.
Well, Djerriwarrh has much more of a focus on distributing the total returns that it makes in form of fully franked dividends to shareholders. The longer-term total return numbers have been higher out of AFIC, but you've had a much higher yield out of Djerriwarrh. The 12-month figures for Djerriwarrh have been very good, and that was really on the back of a shift in strategy. I won't go into too much detail on that because that's really about Djerriwarrh, but we perhaps had been writing too many calls in Djerriwarrh, and it impacted our total return. We've shifted that policy now. Expect returns for Djerriwarrh to be better going forward. As I said, Djerriwarrh is really targeting people who wanna get a much greater proportion of their returns as franked dividends.
Historically, AFIC's had a higher total return when you include dividends and capital growth.
Thanks, Mark. A question around Hardie's and I guess the claims it has in terms of suitability for investment. Yeah. What are your comments around that?
Yeah. A long time ago, an agreement was reached with the New South Wales government, where 35% of the free cash flow of Hardie's is set aside to compensate asbestos victims. With the company still generating significant free cash flow, it is able to adequately meet its requirements under that facility, but also to continue to invest in growth in the business. Managing the growth in the manufacturing footprint as well as R&D that really has set itself apart from its competitors in having the best product in the market. We feel the strong market position, the cash flow that this business generates, a strong management team. We still recognize the long-term opportunity in front of the business, as well as meeting all the liabilities.
Thanks, David. There's a couple questions here about Australia's relationship with China and iron ore prices and potential impact if there's further deterioration there. Have you got any comments around that?
Oh, look.
Effects on the portfolio?
There's probably not a lot we can say. That's out of our control, really. Clear the demand is still there from China and Australia still have, I guess, the best quality ore at a very low cost. While that situation there, it suits our portfolios, have such high-quality assets there. I guess always a risk is are there gonna be alternate sources of supply to China over the long term? I guess there is potential for that to occur out of Africa, but that's certainly years away. That's probably something we look at pretty closely with those companies.
Thanks, Mark Freeman. Back to dividends, Andrew Porter. We get this question on a regular basis in terms of coverage and earnings to support covered dividend payouts. Do you want to comment around that?
Looking at the notes to the account, at the end of the year before we paid the final dividend, we essentially had franking credits. Profits aren't an issue and solvency are not an issue. Franking credits would be a limiting factor with regards to the payment of any dividend. At the end of the year, before payment of the final dividend, we had AUD 0.34 worth of franked dividend that we could pay. Obviously, once one pays out the final dividend, that brings it down to AUD 0.20, but that's before any franked dividends, profits, taxable realized gains this year or next year. In the short to medium term, I'm comfortable with the reserves that we have.
Obviously, we will have to take each year as it comes and see how long the downturn from COVID lasts in terms of company payout ratios and if there's any deterioration in it.
Thanks, Andrew. Miles, are there any further questions on the phone or?
No. No further telephone questions. I might just give people just one final reminder, though. If you did have a question, you can just press star one on your telephone.
Okay, I've got a few more here we'll go through. Just to remind everyone, if we don't get to the questions through the webinar, I will get back to you directly via your email contacts to answer the questions as best we can. A couple of connected questions here. One's about the premium to NTA. As John alluded to earlier on, we are trading quite a reasonable premium to NTA at the moment. Again, as Andrew's pointed out, we tend to do that coming up to payment of the dividend, or the record date for the dividend. Those tend to drop away a little bit with that. I suspect also that the consistency of dividends that AFIC provided over the last two years has also led to that premium.
The second question, John Paterson, which I'll hand to you around this is, are we thinking about doing any capital raisings where shareholders can participate?
Right.
Giving us further money.
Dealing with those two questions. Historically, over time, we've traded at varying times between about 8% or 10% above NTA and 8% or 10% below, usually when there's been some tax threat to dividends, et cetera. I think it's a function of the fact that it's a strong market. There are a lot of new investors who've come on our share register, and I think a lot of people like that as an initial way into share investing in Australia. It's not something we would see as permanent. These things fluctuate. It's a sign of support for our stock at this time. In terms of capital raisings, we're in the very comfortable position that with the scale we've got, we don't have to do capital raisings to reduce the management expense ratio. We've got a very low ratio already.
Really, the times when we think we should raise capital are primarily when we think we can raise capital and utilize it in a very effective way in the marketplace. I think at the moment, our position is that we're happy to raise capital through a DRP or the DSSP, but with markets at fairly high prices, we're pretty much of the view that we're happy to just use our existing funds. If we get an opportunity like March last year, we'll use some borrowing facilities. We don't think the market's that compelling that we should be raising more capital.
Okay. I might wrap it up with this question if there's no others on the phone. I guess the question becomes what level of cash do we currently have, and what do we think we would do in terms of that if there was market dislocation, further volatility going forward?
Sure. The current cash balance is just under 2% of the portfolio. For context, say, six months ago, that was around 1%. That has been increasing over the last six months. We are looking for any volatility in share prices. We have a whole range of companies that we would like to own more of if the right price were to present. If volatility does play out, we would look to deploy the cash as and when those opportunities arise.
As John mentioned, we do have access to debt facilities should we need to dip into those for those purchasing opportunities.
Miles, are there any further questions on the phone?
No further telephone questions. No, sorry. We do have one. Sorry.
We'll make this the last question. As a reminder, the webinar questions that we haven't got to, we'll certainly answer directly via email.
Yeah. We've just got a quick follow-up question from Paul, so I'll throw to Paul.
When you talk of capital management, is it likely you'll trigger your share market buyback to reduce capital and possibly improve yield this year?
No.
Not likely.
Usually, I think we've only done it once or twice in the history of the company and only to a small degree, and it's only when the share price has traded at a significant discount to NTA. It's not an environment we envisage. Even in those circumstances, it's usually in a bad market where there may be some very cheap opportunities to invest the money in stocks that we really like. While we've got the facility, it's not something we envisage we're likely to use in the foreseeable future.
Thank you.
Look, we might finish up now. We thank you all for your participation. We've had a lot of shareholders interested. We'll obviously have the opportunity in three months' time at the AGM to give you another update, which will be, I think, very interesting when we see what companies are saying, particularly as they're traveling through the lockdown in half of this country and how that reflects in their comments. Thank you very much for attending and we think it's been a great opportunity to communicate with you. Thank you.
Ladies and gentlemen, that does conclude today's conference call. Once again, thank you all for participating today. You may now all disconnect.