Australian Foundation Investment Company Posts 3% Profit Increase, Upholds 31.5 Cents Fully Franked Dividend for FY2026

Profit Growth and Revenue Highlights in Diversified Equity Portfolio

AFI reported steady earnings growth for the 2026 financial year, with net profit increasing to $293.5 million from $285.0 million in the previous year, a 3.0% improvement. Net profit attributable to members, excluding minority interests, rose 2.9% to $293.1 million. This growth was primarily driven by higher dividends and distributions from portfolio holdings alongside gains from the trading portfolio during the period.

Operating revenue reached $331.9 million, up 1.2% year-on-year, reflecting AFI’s diversified investment strategy across Australian equities. The company’s core objective remains the delivery of stable or growing ordinary dividends over time, with capital growth as a secondary but significant goal. This conservative dividend policy is governed by the Board’s discretionary approach, with dividend amounts dependent on earnings, realised capital gains, and available franking credits. The modest revenue increase aligns with challenging market conditions during parts of the year and AFI’s focus on capital preservation alongside return generation.

Dividend Maintained at 31.5 Cents Per Share Fully Franked

AFI declared fully franked dividends totaling 31.5 cents per share for the year ended 30 June 2026, consistent with the prior year. The distribution includes a final ordinary dividend of 14.5 cents per share, unchanged from the previous year, and a fully franked special dividend of 2.5 cents per share. An interim ordinary dividend of 12 cents per share was paid on 26 February 2026, accompanied by a 2.5 cents special dividend. All dividends are fully franked, with an additional New Zealand imputation credit of 4 cents per share attached to the final dividend, offering further tax advantages to eligible shareholders.

The Board decided to fund 10 cents per share of the combined final and special dividends from capital gains on which the Group has paid or will pay tax. This pre-tax gain amounts to 14.29 cents per share, enabling some shareholders to claim tax deductions in their personal returns. The special dividend reflects the Board’s strategy to distribute accumulated franking credits without affecting the ordinary dividend stream. There is no conduit foreign income component in either the final or special dividend, simplifying tax treatment for shareholders. Dividends will be paid on 28 August 2026 to shareholders on the register as of 5 August 2026, with shares trading ex-dividend from 4 August 2026.

Cost Management and Net Tangible Assets

AFI sustained its low-cost management reputation, with the Management Expense Ratio (MER) decreasing slightly to 0.14% for FY2026 from 0.16% the prior year. This ratio measures net portfolio management expenses as a percentage of average investment value, including cash. The company operates without additional costs beyond the MER, reflecting a streamlined operational framework and efficient investment management. This cost discipline differentiates AFI in the Australian investment company sector, where many competitors have significantly higher fees.

Net tangible assets stood at $7.93 per share as of 30 June 2026, calculated before the final dividend and deferred tax provisions on unrealised portfolio gains. This represents a decline from $8.33 per share the previous year, reflecting portfolio underperformance relative to the broader market index. The Board emphasizes that AFI’s cost structure and tax-efficient distribution strategy are designed to sustain long-term shareholder value despite short-term performance challenges. The financial position supports ongoing dividend payments and provides flexibility for future capital management, especially concerning franking credit utilisation.

Portfolio Underperformance Linked to Materials Sector Underweight and Healthcare Challenges

AFI’s diversified portfolio returned 0.9% for FY2026 including full franking benefits, significantly trailing the S&P/ASX 200 Accumulation Index’s 7.2% return. The Board cited several factors for this underperformance, chiefly the portfolio’s underweight position in the Materials sector, notably the absence of direct exposure to gold, rare earths, and lithium stocks. These commodities were among the top contributors to market gains, with the Materials sector delivering a 52.1% return (excluding franking benefits) amid rising commodity prices. Major companies like BHP and Rio Tinto each returned approximately 68% during the calendar year.

Additionally, AFI’s portfolio faced notable share price declines in certain quality holdings. Overweight positions in healthcare stocks such as CSL, Cochlear, and ResMed experienced significant price drops during the year. The company’s holdings in digital economy stocks including CAR Group, Seek, and REA Group also declined sharply as investors reassessed long-term business model risks from artificial intelligence developments. Despite these short-term challenges, the Board remains confident the portfolio is positioned to meet AFI’s medium to long-term investment goals.

Market Environment and Sector Performance Overview

The Australian equity market during the reporting period was marked by strong gains in commodity-related stocks offset by weakness in technology and healthcare sectors. The S&P/ASX 200 Accumulation Index (excluding franking) rose 6.1% in calendar 2025, driven largely by materials stocks. Mid-cap resources returned 68.5% and small-cap resources 30.7%, reflecting widespread strength in the resources sector. Energy stocks like Woodside and Santos benefited from higher oil prices, with the Energy sector gaining 14.5%. These sector dynamics created a challenging environment for balanced portfolios with moderate commodity exposure.

The market’s shift toward commodities and energy, influenced by supply constraints and geopolitical factors, contrasted with AFI’s investment positioning. The Board believes that while commodity stocks outperformed in the short term, AFI’s exposure to sectors with sustainable long-term growth drivers remains appropriate for its medium to long-term return objectives. The portfolio’s inclusion of high-quality, lower-volatility equities in healthcare, technology services, and other growth sectors aligns with AFI’s philosophy of building a resilient portfolio rather than chasing short-term sector trends.

Capital Gains Realisation and Franking Credit Management

Throughout the year, AFI continued realising capital gains, accumulating substantial franking credit reserves valued by the Board. The 2.5 cents per share special dividend reflects the Board’s decision to distribute part of these credits without compromising ordinary dividends. Despite recent special dividend payments, ongoing capital gains realisation has kept franking credit balances strong heading into FY2027. This accumulation provides flexibility for future dividend and capital management strategies.

The Board intends to evaluate further capital management initiatives in coming years, considering franking credit balances and realised gains. Shareholders can expect updates on potential special dividends for FY2027 at the Annual General Meeting on 1 October 2026. AFI’s franking credit distribution approach recognises that many Australian investors, including retirees and self-managed super funds, highly value fully franked dividends. By actively managing franking credits, AFI seeks to maximise after-tax returns for eligible shareholders.

Dividend Reinvestment and Shareholder Participation Options

AFI offers both a Dividend Reinvestment Plan (DRP) and a Dividend Substitution Share Plan (DSSP) for shareholders wishing to reinvest dividends. Shares issued under these plans will be priced at nil discount to the Volume Weighted Average Price (VWAP) of AFI shares traded on ASX and Cboe over the five trading days following the ex-dividend date. This ensures reinvesting shareholders receive market-based valuations without discounts that could disadvantage others. Shares issued under the DRP and DSSP carry equal voting rights and dividend entitlements as existing shares.

Shareholders must submit participation notices to the share registry by 5pm (AEST) on 6 August 2026, ahead of the ex-dividend date of 4 August 2026. These reinvestment options meet investor demand for straightforward ways to compound returns through dividend capitalisation, enhancing long-term wealth accumulation. The nil-discount pricing guarantees fair treatment for all shareholders regardless of reinvestment choice.

2026 Annual General Meeting and Shareholder Engagement

AFI will hold its 2026 Annual General Meeting at 9:30 am on Thursday, 1 October 2026, offering shareholders a key opportunity to engage with the Board and management on strategy and financial performance. Details on participation will be provided to registered shareholders in due course. Prior to the AGM, a webcast briefing on the full-year results is scheduled for Monday, 27 July 2026 at 3:30pm (AEST), providing detailed commentary on results and outlook. Access information is available at afi.com.au.

The October AGM timing allows the Board to discuss capital management plans, including FY2027 special dividend prospects as noted in the results announcement. Attending shareholders can question Board members and management on portfolio strategy, performance, and competitive positioning. The July webcast offers an earlier chance to review financial results and prepare questions, promoting informed shareholder dialogue.

Long-Term Strategy and Medium-Term Portfolio Outlook

Despite short-term performance setbacks, AFI’s Board reaffirmed confidence that the portfolio is well positioned to achieve returns aligned with the company’s medium to long-term goals. AFI’s strategy focuses on delivering stable to growing ordinary dividends and capital growth through a diversified Australian equity portfolio managed at exceptionally low cost. This approach emphasises sustainable dividend yields supported by portfolio earnings, tax-efficient capital gains realisation, and prudent franking credit use. The portfolio’s low turnover enhances tax efficiency, benefiting shareholders in higher tax brackets or non-taxable entities.

The Board’s conviction in the portfolio’s quality holdings and business fundamentals supports exposure to companies capable of delivering earnings growth and dividends across economic cycles. Although the lack of exposure to rapidly appreciating commodity and rare earth stocks was a disadvantage during the reporting period, the portfolio’s balance across healthcare, technology services, financial services, and other sectors provides resilience during market downturns and commodity valuation peaks. AFI’s consistent low-cost operation and disciplined dividend policy aim to build shareholder wealth over decades rather than chasing short-term gains or market timing.