Hello, welcome to the Australian Foundation Investment Company full-year financial results briefing. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. All questions will be taken via the webcast. If you would like to ask a question at that time, please enter your questions in the ask a question box at the bottom of the webcast window. I would now like to hand the presentations over to Ms. Alison Gibson, Managing Director of AFIC. Please go ahead.
Thank you, good afternoon. Welcome to this full-year result briefing. I'm Alison Gibson, the Chief Executive Officer and Managing Director of Australian Foundation Investment Company. I've just recently rejoined AFIC, having spent the past five years at HESTA as Portfolio Manager, helping to establish the Australian equities team there. I say rejoined, as I was a Portfolio Manager with the company from 2011- 2021. I'm very excited to be back with the team here and look forward to speaking with shareholders over the coming months. Firstly, I'd like to begin by acknowledging the traditional owners and custodians from all the lands we're gathered on today and pay my respects to their elders, both past, present and emerging.
I have joining me on the webinar today Brett McNeill, Portfolio Manager for AFIC, Winston Chong, Assistant Portfolio Manager for AFIC, Andrew Sutherland, Portfolio Manager for International, Andrew Porter, our Chief Financial Officer, Matthew Rowe, our Company Secretary, Claire Aitchison, Head of Business Development and Investor Relations, and Suzanne Harding, Business Development Manager. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. I'll now turn to the first slide, which is the disclaimer, which says we are here to talk about the company and not to provide individuals with any investment advice. Turning to slide three. This outlines who'll be speaking this afternoon. I'll cover the key features of AFIC and then pass on to Andrew to talk about the results. Brett and Winston will cover markets, the portfolio, and then the outlook.
We'll circle back to question and answers after the formal presentation. You can ask a question via the webcast using the tab at the bottom of the screen. Turning now to slide five, the key features of AFIC. AFIC predominantly invest in Australian and New Zealand companies with a focus on quality, which means companies with a sustainable competitive advantage, attractive returns on capital, solid balance sheets and quality management. AFIC is one of the largest listed investment companies on the ASX, with approximately 150,000 shareholders and an independent Board of Directors. Importantly, shareholders own the management rights to the portfolio. The company operates at a low cost with no additional fees. We seek to be a long-term investor with low turnover, which is more tax effective for shareholders. AFIC has a long history of paying stable to growing fully franked dividends.
The team manages three other funds, Djerriwarrh, Mirrabooka and AMCIL. Turning to slide six, AFIC's key investment objectives. These are to pay stable to growing ordinary dividends over time and to provide attractive total returns over the medium term. Moving on to slide seven. A key objective of AFIC, as I said, is to provide stable to growing ordinary dividends over time. The amount of any ordinary dividend remains at the discretion of the board and depends on the level of earnings and the amount of realized capital gains generated for the year, as well as the balance of franking credits. Outlined in the chart is the long-term history of the dividends paid to shareholders. Over the long term, the company has delivered on its objective of paying stable to growing ordinary dividends, irrespective of any special dividends that may have been paid.
The board considers special dividends to be the most appropriate way to distribute the franking credit reserve that has built up in recent years. Despite the recent payment of these special dividends, further generation of realized capital gains during the year means the franking credit balance remains strong. Directors will continue to consider further capital management initiatives for future financial years, taking into consideration the balance of franking credits and the generation of realized capital gains. We anticipate providing an update regarding any special dividends for financial year 2027 at the AGM in October this year. The final slide I will talk to is slide eight. This speaks to AFIC's other objective of providing attractive total returns over the medium to long term. These figures include the benefit of franking.
Over 25 years, the portfolio performance has been ahead of the index, notwithstanding performance has lagged more recently, which the team will discuss later in the presentation. Turning over to the next slide, I'll hand over to Andrew Porter, our Chief Financial Officer.
Thank you, Alison, and good afternoon, ladies and gentlemen. Our usual results summary slide with some additions this year just to try and make it a bit more exciting. As you can see from the first box, our profit was up some AUD 8.5 million on last year. There was an increase in dividends, including specials from ARB, BlueScope Steel, and Wesfarmers, and a change in dividend timing from one of our larger holdings, ALS. We also had a reduction in costs from last year, which included some changes in staffing and non-vesting of incentives. This impacts the MER or management expense ratio, which was at 0.14% this year, down from 0.16%. This is equivalent to AUD 0.14 for every AUD 100 invested. It's a ratio of the cost to the average portfolio value over the year.
Although costs are a key determinant of the MER, obviously, and we do keep a close eye on them, the biggest factor in the MER itself is the portfolio and how it moves during the year. We're often asked what franking cover do we have for future dividends, thought that this year we'd actually include it in the presentation. Currently, after paying the final and special dividend, which as you can see here are set at AUD 0.145 and AUD 0.025 respectively, AUD 0.17 in total. We have sufficient franking credits to cover AUD 0.55 per share of future dividends. As longer shareholders will know, and as Alison has shown on the previous chart, AFIC did not cut its dividend during the GFC or COVID when many others did.
One of the benefits of the LIC structure is that we can keep reserves for a rainy day, which ETFs, which a trust cannot. We do need to keep some franking credits in the tank for the next GFC or COVID. Having said that, AUD 0.55 is a healthy number, and as Alison has previously mentioned, the board will be looking at the best way to distribute any excess franking credits, and we'll have more to say on that at the AGM. The total portfolio was down from AUD 10.5 billion- AUD 9.8 billion, I'll come onto that at the next slide, as we have been asked before how come the return is flat for the year if the portfolio and the NTA is down.
The dividend we talked about, I should also note we've been actively buying shares back when it has been proven to do so, which is the last box on here, some AUD 243 million worth during the year. The board will continue to keep this under review. The next slide shows how the NTA has reduced. I should note that for the return figures, which we talk about, this includes dividends. It is what is called an accumulation return. The grossed-up return figures that we quote also include the franking credit on the dividends. You can see here that although the portfolio fell in value, this was effectively covered by income. The real fall in the NTA is mainly the dividends paid, plus tax and expenses. Hope that's clear, everybody. These slides will be available on the website.
The next slide shows the history of premium to discount. I should note, and many shareholders are aware of this, we do show the premium discount every month with the NTAs. We always try to remind shareholders and other investors to look at this. That was 11% at the end of the year. The board remained very conscious of the discount, and as previously discussed, we've increased our marketing activities, and Claire and Suzanne both here as tribute to that, and the share buyback plan remains active. With that, and I'm very happy to take questions, of course, at the end of the presentation. I'll hand over to Brett.
Thanks, Andrew, good afternoon, everyone. After joining the AFIC group of companies nearly seven years ago and being appointed as the AFIC portfolio manager in October last year, it's great to be here today presenting my first full-year result for AFIC. Whilst the company continues to deliver on its dividend objective, as we've shown in some of the earlier slides, it was another tough year in terms of our total return, and we give some more detail about that on slide 14. Starting with the one-year number, which is AFIC's total return, including franking and including all costs and taxes paid, that was 0.9% for the 12 months to June 30th, 2026. That was clearly behind the total return of the broader share market as measured by the ASX 200, also including franking, and that was 7.2%.
The underperformance over the last year has now dragged down our longer-term performance numbers with our three-year, five-year, and 10-year performance also behind our benchmark. On the left-hand side of this chart, though, we give a bit more detail on the one-year number, splitting it into first half and second half performance for the financial year. As we can see, whilst it's a short timeframe, performance has improved in the second half of financial year 2026, which has been encouraging. Slide 15 gives some more detail on what sectors have driven the performance of the broader share market over the last year. We show here the total returns, not including franking this time, of the ASX 200, which was 6% for the year to June 30th, 2026, alongside the key sectors of the share market.
As we can see, the material sector was the key driver of market returns over financial year 2026, with very strong performance coming from the major miners. Both BHP and Rio delivered a total return of 68% for the year. Gold and lithium stocks were also strong, as were small and mid-size resource companies. The material sector, very strong and clearly the best performing sector within the market at 52%. Energy, consumer staples, and utilities also performed well, and their performance was driven mostly by stocks such as Woodside, Ampol, and Coles. At the other end, healthcare and information technology were the worst-performing sectors, as stocks such as CSL, ResMed, Cochlear, WiseTech, and Xero all delivered significant negative returns. Hopefully that gives a bit more detail on portfolio market returns as well as what sectors drove it.
I'll now pass over to Winston, he's going to talk through the key stock drivers of our recent performance, as well as key changes in the portfolio over the last year.
Thank you, Brett, and good afternoon. On slide 16, I'll cover off on some of the key drivers of portfolio performance at the individual stock level. Starting with the positive contributors, the strong resources market was a feature of the financial year 2026, and our portfolio benefited from holdings in Rio Tinto and ALS, which were up 68% and 38% respectively. Rio enjoyed resilient iron ore prices and a strong appreciation in the copper price, supported by demand linked to the AI infrastructure build-out and electrification. ALS, which provides testing services to the life sciences and mining industries, contributed strongly to portfolio returns owing to the strength in its commodities testing business. Woolworths was another strong contributor as the company recovered from issues in the prior year. Improved sales trends and a sharper management focus on costs supported better earnings and a re-rating in the stock.
CBA contributed positively in relative terms due to our underweight position. While the underlying business remained sound, the stock underperformed the broader market as it de-rated from an elevated valuation at the start of the year. Turning to the negative contributors on the right-hand side of the slide, CSL and ARB both declined significantly during the year following earnings downgrades. CSL was particularly disappointing, with multiple earnings downgrades driven by competitive pressures, weaker vaccination rates, and underperformance in Vifor.
The company also announced Chief Executive Officer and Chief Financial Officer transitions during the year, and together, these factors resulted in a significant de-rating in the stock. ARB was also impacted by earnings downgrades, reflecting a softer domestic market and margin pressures, which similarly led to a sharp de-rating in its multiple. We retain holdings in both CSL and ARB as we continue to regard them as quality businesses with attractive long-term prospects.
While the valuations are now lower, we have not added meaningfully to either stock in the last six months as we are waiting for clearer signs of improvement. The negative share price moves in ResMed and CAR Group stand in somewhat contrast from CSL and ARB. Both companies have consistently delivered strong earnings outcomes driven by growing penetration in their respective markets, but market concerns around longer-term disruption have weighed on valuations. For ResMed, that concern relates to the potential long-term impact of weight loss drugs on the obstructive sleep apnea market. For CAR Group, it relates to the possible effect of artificial intelligence and large language models on classifieds businesses. At this stage, we are monitoring these risks but are observing limited evidence of impact to date, and we believe that current valuations more than reflect those concerns.
We have been net buyers of both stocks during the year. In managing the portfolio, we continue to look for opportunities to add to quality companies with good long-term prospects where we believe the market is underappreciating that outlook. We highlight some of this activity on the next slide, which we'll move to now. On the top left-hand side of the slide, you can see that we've added to Sigma during the year, the owner of the Chemist Warehouse franchise. Sigma is delivering exceptionally strong sales and earnings outcomes underpinned by growth in health and beauty categories and a store rollout. We added to our existing position at various points of weakness during the year at what we regarded as attractive valuations relative to other consumer staples. We also added to portfolio stalwarts JB Hi-Fi and Woolworths at appealing valuations.
In both cases, weaker share prices reflected issues we believed were more likely to be temporary than structural, creating attractive long-term buying opportunities. We also added to the position in Telstra during periods of share price weakness over the year. Telstra continues to offer an attractive and growing stream of fully franked dividends, supported by the strength of its mobile network position. The portfolio also increased positions in CAR Group and REA Group as artificial intelligence-related concerns drove significant weakness in classified stocks, despite continued solid operating performance and limited evidence of disruption to date. In addition, market concerns around artificial intelligence created opportunities to initiate new positions in software and technology names, including Pro Medicus, Life360, and Temple & Webster at more attractive valuations. To fund this activity, we trimmed positions where share prices have moved ahead of fundamentals.
This included selected bank holdings where valuations were looking expensive, particularly CBA, Westpac, and NAB. In addition, we trimmed some of our resources and industrial-related exposures where valuations have become stretched, including ALS and Wesfarmers. Our position in BHP also reduced due to option exercises. We also exited smaller positions in Sonic Healthcare, WiseTech, and Worley, primarily reflecting a reduction in conviction in their long-term quality characteristics.
With that, I'll hand back to Brett for an overview of the portfolio.
Thanks, Winston. Slide 18 gives a snapshot of the AFIC portfolio as of the June 30th, 2026. The portfolio's total value of AUD 9.8 billion was across 59 Australian and New Zealand listed stocks, and this amounted to a net tangible asset value of AUD 7.93 per AFIC share. We also show here on the slide the top 25 holdings in the portfolio led by BHP, which is our largest holding, followed by Commonwealth Bank, Macquarie Group, Wesfarmers and Westpac. Overall, we feel that our key holdings are diversified across quality companies, we've got a good balance between stocks owned primarily for income, such as Transurban, Telstra and JB Hi-Fi, and also those owned primarily for growth, including Goodman Group, ResMed and Fisher & Paykel Healthcare. Before we move to our outlook comments, we give an update on our international portfolio and strategy on slide 19.
Pleasingly, the portfolio has continued to generate value for AFIC shareholders since inception. As we've previously announced, at this point, we aren't considering the listing of a separate international equities investment company. We believe the better option for now is to continue to invest in the international companies within AFIC, but to do it in a more concentrated and complementary style. Given that, we show some of the key portfolio statistics here. We now own 19 stocks in the international equities portfolio, and that's led by the biggest holding, which is Schneider Electric, as well as household names such as Amazon, Visa, Netflix and Microsoft. Overall, the international portfolio was worth AUD 149 million at the end of the financial year, and that equates to 1.5% of the total AFIC portfolio value. Turning now to our outlook section, which begins on slide 21.
Firstly, just to note that this financial year 2026 was actually the fourth year in a row of positive return for the Australian share market. We think that's noteworthy and somewhat surprising, really, given the shocks that have occurred to economies and markets over recent times from events including the Trump tariffs last year and of course, the current Middle East conflict. With that backdrop, we show here two widely used valuation metrics for the Australian share market. The first being the price-to-earnings ratio, which is on the left-hand side of slide 21. The Australian share market is currently valued at just over 17x forecast consensus earnings for the year ahead, and whilst this is below the recent high for the price-to-earnings ratio of 20x , it is still above the long-term average of 15.1x .
In terms of the dividend yield, which we show on the right-hand side, the market only offers a forecast dividend yield at the moment of 3.7%, which is measured before franking credits. That dividend yield is below the long-term average dividend yield for the Australian share market of 4.5%. Both of these valuation metrics indicate to us that overall, the broader Australian share market is what we call moderately expensive at current levels. Turning to slide 22. Against this valuation backdrop, our focus remains on ensuring that the portfolio has the right balance across key sectors such as resources, banks and consumer staples, which we expect will continue to generate a solid level of fully franked dividend income.
We continue to believe that owning a diversified portfolio of high-quality companies can continue to deliver the attractive dividends and capital growth and total returns that have been produced over the long term. Finally, just to reiterate our update and position on capital management. As Alison and Andrew mentioned earlier, our franking reserves remain very strong. Given this, directors will continue to consider further capital management initiatives for future years, and we'll give an update on this at the annual general meeting in October 2026. With that, I'll hand over to Claire, who's going to conduct the question and answer session.
Thanks for your questions, everybody. We've had quite a few questions on the capital gains tax changes. Andrew, could you maybe explain what impact will the changes to the capital gains tax settings have on LICs and maybe speaking more to traditional LICs?
Yeah. Difficult to say at the moment. LICs require separate legislation. Treasury are aware of this, and we are part of an industry group that will be having discussions with Treasury over the coming months, and we will obviously keep shareholders informed when that legislation is issued. The original intention of the LIC legislation, which many shareholders may recall, was to keep shareholders in an LIC in the same position tax-wise as taxpayers who own shares directly or through a trust. That will be the starting point of our discussions. In the meantime, nothing has changed, and the LIC capital gain paid with the final and special dividend, which is AUD 0.10 of the AUD 0.17, is paid out in the normal way, and shareholders will be able to put that through on their tax return in the normal way.
AFIC's policy has always been to pay those LIC capital gains out as and when they arise.
Okay. Thank you. We've also had a number of questions on dividends. Andrew, to you again. Could you tell us how AFIC sets the ordinary and special dividends?
The ordinary dividend is obviously at the discretion of the board. It depends on the level of earnings for the year and the forecast level of earnings. Earnings for this year were AUD 0.235, and the ordinary dividends are AUD 0.265. Added to that, we've got to have a look at the realized gains that we've had, that we have in the year, and the amount of franking credits. The board will look at all of that and say, "Okay, what can we reasonably expect to do in terms of the ordinary dividend?" Keeping in mind our policy of paying a stable to growing ordinary dividend over time, and how much should we be paying out now as special dividends.
As we've said, we'll have more to say on that in October at the AGM when we've had a chance to look at how this year is shaping up.
Thank you. As a follow-up, we've also had a number of questions about the frequency of dividends. Would we consider paying quarterly dividends?
It's something that has been discussed, but not at the moment. Djerriwarrh is paying a quarterly dividend, and I suspect that's where many shareholders have both. They're different types of beast in terms of an income fund and what AFIC is, we need to be conscious of the costs of paying a quarterly dividend, the dividends that we get in from the companies that we invest in, and when they come in. I would never say never, but it's not something that's on the immediate agenda.
Okay. Just sticking with you for the meantime, you mentioned about the share buyback program earlier. What's the maximum number of shares that can be bought back under the program?
The maximum number of shares as per the Corporations Act legislation, Matthew can correct me if I get this wrong, is 10% of the issued capital. That's the maximum event that can be bought back. A company can buy back more of that, but it would have to go to a meeting of shareholders to get approval for that. At the moment, the buyback plan is well within that 10%.
Thank you. This one's for you, Brett. As we saw earlier, CSL was a detractor of performance on a relative basis. Do we still have confidence in CSL?
Thanks, Claire. I think the first thing to address is that it's been an incredibly disappointing and frustrating investment for us. It was previously one of the biggest stocks in the portfolio. We continue to hold the stock, but because of the decline in the share price, it's slipped down to, I think it was number 12 in terms of the biggest holdings in the portfolio as of the end of the financial year. How we're assessing the company at the moment, we do have confidence in the core business, the Behring business because of what are really essential life-saving products that they produce there and its role in that industry. The parts where we do lack confidence at the moment, this is particularly when it comes to would we buy more, are around the future strategy and the management.
CSL's in transition at the moment. It's got an interim Chief Executive Officer, the board's progressing a search for a more permanent Chief Executive Officer. For us, given backing quality people is one of the hallmarks of our investment approach, it's very hard for us to buy more at the present time, given the company's declining returns on capital when they don't have a permanent Chief Executive Officer. For us, it's firmly in the turnaround camp at the moment. The share price has derated significantly, the valuation at the moment we think is undemanding, overall it justifies a hold in the portfolio. We're not prepared to give up on it down here, noting that it has had a small albeit welcome bounce in the share price in recent months.
Our position at the moment is to hold and really wait for further signs, particularly on the Chief Executive Officer appointment and their strategy, before we might have the confidence to buy some more.
Thank you. We've got a question here about gold, with the recent gold price correction, does this provide an opportunity for AFIC to add it to the portfolio?
It's a very timely question because we've never ruled it out, clearly we haven't owned gold over the last couple of years, which has been one of the contributors to the underperformance of the portfolio. The lower total return versus the benchmark. Pleasingly, we didn't chase the gold stocks up when the gold price went over AUD 5,000 an ounce, it has come back significantly recently. We've had physical gold price fall almost since a lot of us saw the headlines of the people queuing up to buy gold bullion in Martin Place, which coincidentally was about the top in the gold market. Since then, a lot of the heat seems to have come out of the market, both the physical gold price and the gold stocks have even underperformed that.
Given we can see the benefits of investing in this almost a separate asset class, in a sense, over the long term, looking at it through our quality lens, there is quite a few companies that we think do meet our quality criteria. We are looking for gold miners that own a well-diversified portfolio of high-quality, low-cost assets run by management teams we can trust, and really importantly, are able to demonstrate disciplined capital allocation, which has arguably been missing from the sector at certain points in its history. We think a number of stocks line up on that now. We are looking at it really closely and expect an update on that towards the end of the year, so at the AGM.
Great. Brett, sticking with you, can you talk to us a little bit about the use of mid and small caps in the portfolio, and has that changed since you have come on board as portfolio manager?
It has. Not in a material sense in terms of percentage of the portfolio, more so in terms of our strategy in this part of the market. When we reviewed the performance of the portfolio, and we do that continuously, but I think you do it more after a period of underperformance, because that is when you learn, I think, your greatest lessons. Our experience in small and mid-caps was a key focus there, and we really felt that the AFIC portfolio had not benefited to the extent that it should have from some of the team's best calls in the small and mid-cap part of the market. To that end, we have changed the strategy in that, which is we want to have more of a dedicated portfolio of small and mid-cap companies within the AFIC portfolio.
Like I said, whilst the overall amount of small and mid-caps will not change materially, we think it will be spread across a greater number of stocks, say approximately 10 stocks. We are not relying on trying to pick the best one or two small and mid-cap companies, and to really get more involvement from the small and mid-cap experts within the investment team here. The team acted on a lot of opportunities we saw in the market sell-off in February and March this year and added a number of names, and they were some of the stocks that Winston mentioned have been added to the portfolio. We are very confident now about this strategy and expect it to deliver better results from this part of the market over the medium long term.
Okay, great. Just following on with the international portfolio. As at the end of June, it was about 1.5% of the AFIC portfolio. Is there any limit to what that portfolio size will be?
Yeah. We haven't put a number on it yet other than we're really excited about the updated strategy. Clearly, we believe in this space because we want to persist with this strategy of investing in high-quality international companies, despite not currently planning to list a separate international equities investment company. We think with a more concentrated portfolio and really investing in the AFIC way and having a dedicated team within our broader investment team doing that over time it can add more value to the AFIC portfolio. Whilst it would be natural to expect that the percentage of international equities will grow in the AFIC portfolio over time, we're not putting a number on it. We obviously like to do things slowly and carefully, and we'll see how it goes, but it could be a source of growth over time.
Okay, great. Andrew, what actions are being taken to manage the discount to NTA?
We mentioned that during the presentation. Just to reiterate on that, we are aware of it. We have increased our marketing efforts on that. We have also conducted a buyback, that was being in response to many shareholders' questions about why we're doing that. We're doing the buyback really in response where we see value in buying back those shares. If you can buy back good quality portfolio of shares at a substantial discount and it's the right time in the market to do it, that's when we'll do that. I think the other thing on top of all that will be sticking to our guns and having the policy of that ongoing stable to growing dividend over time and capital growth.
If we can hit those benchmarks, which we obviously haven't done in terms of the latter part in the last year, that will also help.
Thank you. Alison, this one's for you. I know it's early days, but can you give us some early indications on any changes?
Thanks, Claire, yes, it is early days. It's the beginning of week three. Obviously, as the new Chief Executive Officer, I will take the time to work with the team to review everything, our processes and things like risk management and how we're using AI. Importantly, I do believe in the mandate, particularly our investment philosophy of investing in quality companies for the long term, that won't change. It's been one of the core tenets of our business since 1928. In my time in markets, 25 years, I've seen a number of cycles where certain sectors and stocks can become overhyped for a period of time. We do believe that quality outperforms over the long term. I actually think there's a really interesting opportunity for those that can truly take a long-term view to step into the volatility we're seeing in markets.
I guess none of this will come as a surprise given I was with the AFIC business for 10 years. Again, that investment philosophy and investment mandate won't be changing. It is early days to say much more than that.
Thank you. Brett, this one's for you. The question is, I believe you write call options against some holdings, but to a lesser extent than what you do in Jarry. Would you consider increasing this strategy in AFIC to boost shareholder dividends?
Yeah. No, it's a good question because there is some activity in the options part of the portfolio. One of the key considerations is the trade-off between income and growth. Naturally, there is a cost to writing call options and generating income from it, which is that you can sacrifice longer-term capital growth. I don't think it will be a much bigger feature of AFIC because at the moment it contributes a small but important amount of income. We don't intend to push that any further. One, because we think at the moment the income growth trade-off is about right, and two, we already have an LIC in Djerriwarrh that uses that as a key part of its strategy to generate an enhanced yield. We're happy with the balance that we've got at the moment for AFIC.
Okay. Thank you. How is the team approaching monetary policy uncertainty and the emerging pressure on the consumer discretionary segment?
Yeah. Well, that'll be a key feature of results season. We'll get an update over the next four weeks, really, from the listed companies that we invest in and that we monitor, because the cost of living pressures in the economy have continued to grow. We'll be looking really closely at a whole lot of stocks, but particularly some of our big holdings like Wesfarmers, which owns some of the best retail businesses in the country, like Kmart and Bunnings. We've got Sigma Healthcare with Chemist Warehouse. Also JB Hi-Fi. It feels like things continue to get tougher from a lot of the headlines and the like. We'll get more up-to-date information from company management teams and their outlook statements during results.
On monetary policy, we always monitor the macroeconomic environment, we don't try and pick themes or pick turning points in the macroeconomy and position in the portfolio. It really comes back to what we see as our bread and butter, which is analyzing companies from the bottom up and investing in high-quality companies that can outperform over time. Where you can pick up the impact of things like monetary policy and the like is the type of exposures you have. Gold's interesting there. Also just being well-diversified across the economy to make sure across the portfolio to make sure you've got a broad spread of exposures and they're not fully aligned to one theme.
Brett, you mentioned in the presentation that we exited Sonic Healthcare. What was the rationale for that?
Yeah. Sonic's been a long-term holding in the portfolio, We used it as a funder really. One, for the purchases that we made in stocks, Also for the share buyback, where we've done a significant amount of buying, like Andrew mentioned, given the compelling value we saw there with the AFIC shares trading at a discount to NTA. Some of the reasons why Sonic Healthcare was put on the chopping block is it really had declining returns over a long period of time. This is a business that used to earn a double-digit return on equity, whereas for the most recent year, it's been more like mid-single digits, a return on equity of around about 6%- 7%. The balance sheet's not especially conservative.
As well as that, we just had concerns about future growth in the dividend, given when you look at the last 10 years, the dividend per share had increased a lot without a corresponding increase in earnings per share, and at the same time as the balance sheet had worsened. It became a natural funder for us. Really just overall, we lack conviction in the stock's long-term prospects.
We've got a couple of questions around this next topic. How do we account for companies with climate risks and related climate risks such as BHP? As this question says, are they greenwashing companies? How do we view those companies, and how are we investing?
Yeah, sure. I can take that one. Thanks, Claire. I think when it comes to our investment philosophy as a firm, we are not an ESG fund. What we do, though, as long-term investors is integrate the thinking around ES G fund and also just broader sustainability into our investment process. Where it really comes down to is the balancing the long-term risks and opportunities and our team's assessment of those against where the valuations sit. Broadly speaking, it is, if we're talking about climate risk, it is balancing the climate risk from a materiality perspective against where the valuations in our stocks sit.
Following up from that, how confident are you in the Goodman Group, and what's your confidence levels that the data center boom will not just be a dazzling story, as this question poses?
Yeah. No, it's a good question, and one that we ask ourselves constantly. Yeah, it is a reasonable holding in the AFIC portfolio. As the question outlines up there, we have confidence in Goodman Group for a few reasons. First is the aligned management team. There's significant insider ownership. There has been some insider selling recently, but the thing that balances that for us is that the incentive program for the executives is very long-term by any kind of ASX-listed standards. On the data center boom, our conviction in that in the near term is quite high. The demand continues to grow, and supply remains constrained.
There's a few things that are specific to Goodman in the way that the business is managed conservatively that gives us that confidence, and that's primarily around the balance sheet, with the company having raised equity last year to fund this data center strategy, as well as what the quality of the properties that are all metro located in tier 1 cities. We think that provides some residual value in the portfolio. Overall, we think that the returns they'll be able to get from the data center strategy should support strong earnings growth over the next three to five years. We're watching closely for delivery, and we're really in that window now.
Thank you. Andrew, here, there's a question about the four LICs. AFIC is one of four LICs in the stable. Would there ever be a consideration to merge the LICs?
It's something we have been asked about before. We'd say that each of our four LICs has really quite different mandates and shareholders look to it for different things. We've talked about Gerry and the quarterly dividend. Gerry's focus is really on income. Brett talked about options, and that's why it has such heavy option activity. It's prepared to sacrifice that capital uptick on for writing those options in order to generate that dividend. We think that's really important for that particular part of shareholders who are saying, "I'm not buying green bananas at the moment. I'd rather have the dividends now and get them out." Whereas AFIC are ones who are more looking at a balanced return, including that capital growth.
Mirrabooka is a more active company that buys and sells in the small and mid-cap. Again, that carries a higher degree of risk, higher degree of activity. We think that's a really attractive story to investors. There aren't many companies that are in that space that can give you a dividend yield that is variable because the special dividends go up and down that invest in that sector of the market. We think that's attractive. AMCIL will be reporting tomorrow. That is a small conviction portfolio, and again, traditionally, that's got a higher degree of volatility than many AFIC shareholders would like. People, again, are happy to invest in that because when the returns are good, they can be very good. We think there is a place for all four companies on that.
We do continue to look at the cost across all four companies and ensure that shareholders are getting value for money.
Thank you. Brett, the banks, you mentioned in the presentation that the underweight position in CBA was actually a positive on a relative basis. What's the positioning on the banks at the moment, and what's your view?
Sure, Claire. We think overall, the sector's good quality. We think the sector's in a good position in terms of the key fundamentals that we use to assess the banks. The capital ratios that they report, balance sheets are in good shape. The level of provisioning that they've got against possible and future bad and doubtful debts is very strong. Strategies are quite simple, and we think each of the four major banks is managed very well and have put together a good track record recently. The thing that holds us back is valuation. AFIC always had a solid weighting in the banks. That's lower today than it was 12 months and 24 months ago, especially given the selling that we've done in CBA and also more recently in NAB and Westpac. Overall, we've still got a good weighting in the banks.
It's less than the weighting of the banks in the ASX 200 index, we've got an underweight position. At current share prices, we're very comfortable with that, because whilst we see a good, solid dividend stream, we think the outlook for earnings and dividend growth from the banks is probably modest at best for the next couple of years, with valuations pretty full at the moment.
Thank you. We've got a question here about adding some exposure to the rare earths. Is that something you'd consider for the AFIC portfolio?
It is something we consider. It's been a good space. There's some compelling thematics there around control of critical minerals and the like. There's a very good quality listed stock exposed to that on the ASX, which is Lynas. It's one that we haven't owned. Similar to some of the other resources stocks, like what we were talking about with gold, the share price has come back a fair bit recently. I think it got up to around AUD 20 and is now trading around AUD 15, so it's well off the highs. Got a management transition there. Our previous interactions with the company have been positive, so it's one that's on the watchlist for sure.
Okay, great. Just a reminder that you can ask questions by tapping the question button on the webcast, I believe. Got a question here about buybacks and the mechanics of them, given our cash balance. How long can we keep up the share buybacks with the lower cash balance?
Well, it's something we maintain. It's like any other liquidity question. That's how we approach it. We're buying back AFIC shares predominantly because we think they offer good value at the moment. That's how we approach it. We have got debt facilities for AUD 150 million, as Brett says. We're also exiting some stocks that we think there are better cases for investing in elsewhere. That will also include other stocks that we buy. It's not just AFIC that we've been buying back as Winston went through. We've also been buying back other stocks. It's something we'll keep under review. We have dividends that'll come in from the companies that we invest in, as well as paying out our dividends.
Thanks, Andrew. It looks like that's pretty much all the questions that we've got for the time being, so we might look to wrap it up. Thank you everyone for attending, and we look forward to seeing you at the AGM.
That concludes today's webinar. Thank you for your participation. You may now disconnect your line.