AFIC warns about dividend outlook as rates and inflation rise

AUSTRALIAN Foundation Investment Company has warned on the dividend outlook as interest rates and inflation push higher, with managing director Mark Freeman calling out Rio Tinto and BHP as potential weak spots following a series of bumper payouts from the cashed-up miners in recent years.

Speaking to The Australian after handing down AFIC’S full-year results, which showed a surge in profit alongside a negative portfolio return, Mr Freeman cautioned on the challenges facing equities in coming months as investor sentiment swings rapidly between segments of the market.

“(The dividend outlook) could be more challenged when you look out to (February 2023) if interest rates really start to bite,” Mr Freeman said.

“That would be in certain sectors. I think the banks will probably be OK but resources stocks are now supplying a lot of the dividends. If the iron ore price goes down again then we’ll have an appearance of a market where dividends are under a bit of pressure.”

In the fund’s negative 6.8 per cent return for the year, the biggest drag was the decline in the valuation of AFIC’S highquality companies, he added.

“Quality stocks got sold off from pretty lofty valuations … but the rotations through sectors in the market are happening very rapidly at the moment. If you look at the past year, quality got bought up, then got heavily sold off, then resources and cyclicals were strong and now it’s started to go the other way.”

Despite the portfolio hit, Mr Freeman said he was convinced about the prospects for the fund’s holdings, which include the big banks, CSL, Wesfarmers, Amcor and Telstra.

The turnaround in sentiment away from resources and cyclicals was evidenced by the uplift in quality stocks in the first few weeks of the new financial year, he said.

BHP’S stock is down 7 per cent since July 1, while Rio Tinto is off 3 per cent, as is energy major Santos. In contrast, CBA is up 7 per cent, while

Westpac and NAB have surged around 8 per cent. ANZ, which a week ago announced plans to buy Suncorp’s banking arm for $4.5bn, has risen 3.5 per cent over the same period.

For the year through June 30, AFIC’S net profit jumped nearly 54 per cent on the back of bumper dividend payouts, while revenue rose 50 per cent to $393.4m.

AFIC declared a fully franked final dividend of 14c a share.