Australian Foundation Investment Company (AFIC) reduced its stake in Commonwealth Bank of Australia (CBA) due to its “extreme valuation”, but acknowledged the decision had dampened returns and contributed to its underperformance in the last financial year.
One of Australia’s oldest investment companies, AFIC announced a 3% drop in net profit to A$285.0 million (US$187.6 million) on revenue from operating activities which eased 1.9% to $328.1 million in the 12 months to 30 June 2025.
The company declared a fully franked final dividend of 14.5 cents per share, the same as last year’s final dividend, and a special dividend of five cents per share, to be paid on 28 August to shareholders on the register on 6 August.
The special dividend partly reflects the significant realised capital gains and franking credits generated by the trimming of the shareholding in CBA (ASX: CBA).
Activity in the portfolio was focused primarily on recycling capital into existing holdings by trimming positions in companies trading at “extreme” valuations, such as CBA, and companies thought to be facing significant challenges, such as Domino’s Pizza Enterprises (ASX: DMP), Mineral Resources (ASX: MIN) and Ramsay Health Care (ASX: RHC).
The portfolio return of 10.7% was below the S&P/ASX 200 Accumulation Index return of 15.1% because of strength in the gold sector, in which it did not traditionally invest, and underperformance by quality companies: ARB Corporation (ASX: ARB), James Hardie Industries (ASX: JHX), CSL (ASX: CSL) and Reece (ASX: REH).
But AFIC considers the long-term prospects of these companies remained strong.
“In the case of Commonwealth Bank of Australia, we now view the current valuation as extreme and accordingly have been reducing our holding in recent months,” AFIC said in an ASX announcement.
AFIC said although the trimming of the CBA stake had “weighed on returns given its ongoing strength in the market”, it believed the shares were sold at a time when they were trading at extreme valuations.
The company said market conditions remained unpredictable, the outlook for economic growth was unclear, and the dispersion in market valuations between winners and losers was wide and likely to exacerbate volatility.
At the time of writing shares in AFIC (ASX: AFI) were trading five cents (0.67%) higher at $7.54, capitalising the company at $9.47 billion.
Founded in 1928, AFIC is known for its strategy of buying and holding shares in Australian companies that generate long-term capital growth and reliable income.
