The Soul Patts share price has declined by 8% over the last month. Here's why I think it looks like a buy.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), also known as 'Soul Patts', is an investment conglomerate business. It is often called the Australian version of Berkshire Hathaway due to its large stakes in several ASX-listed businesses.
Here are three reasons why I think Soul Patts is worthy of a place in most portfolios:
Diversification
Soul Patts has an impressive portfolio of investments. Most investors know that a good way to improve long-term returns is to invest in good businesses in a variety of industries.
A large number of Australian investors' portfolios are tied up in investments in Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
I think it's great that Soul Patts' main investments are in businesses like TPG Telecom Ltd (ASX: TPM), Brickworks Limited (ASX: BKW), New Hope Corporation Limited (ASX: NHC) and Australian Pharmaceutical Industries Ltd (ASX: API).
The diverse portfolio of growing businesses has helped the Soul Patts share price grow by 225% over the last 14 years.
Shareholder-aligned management
Management tend to make more considered decisions when management interests are aligned with shareholder interests. They also have a lot of capital at stake if they make any large mistakes.
Soul Patts has been served by the same families over a number of generations, which provides excellent continuity for the business. All of the families have large shareholdings and want the company to succeed for their own success.
Impressive dividend history
Soul Patts has been paying out a dividend every year for many decades.
It has increased its annual ordinary dividend every year since 2000, which has provided great certainty and improving returns for investors.
It's impossible to say how long that streak will continue, but with management's conservative approach I can see it continuing for a long time to come. It had a payout ratio of 77.9% of its regular operating cash flows.
Risks
There is always the risk that one of its major holdings has a large price decline, such as TPG over the last year. By comparison, an index with many more holdings wouldn't be affected as much by one holding. However, I think Soul Patts is better than an index because most of its investments should beat the performance of the Australian index.
Soul Patts is receiving a lot of coverage about its corporate structure and its investment in New Hope with the New Acland coal mine. Hopefully both issues can be resolved soon without any damage to the Soul Patts brand, quality, or earnings.
Foolish takeaway
Soul Patts is currently trading at 15x FY17's estimated earnings with a grossed-up dividend yield of 4.41%.
I think this is a great price for a long-term buy and hold strategy. There may be some bumps along the way, but I can't see anything that would derail this great Australian investment giant.
