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Why I’d buy Washington H. Soul Pattinson and Co. Ltd today

Washington H. Soul Pattinson and Co. Ltd  (ASX: SOL) is a self-described ‘investment house’. It holds a diverse portfolio of assets across a range of industries, including investments in natural resources, building materials, telecommunications, retail, agriculture and property.

Some of the more well-known brands in which the company owns significant stakes are TPG Telecom Ltd  (ASX: TPM), Australian Pharmaceutical Industries Ltd  (ASX: API), and Brickworks Limited (ASX: BKW).

Washington H. Soul Pattinson is also well known for its long history of reliable dividends. It has been listed on the ASX for 114 years and has never failed to pay investors a dividend in that time. The current dividend yield is 3.1%, fully franked. Unsurprisingly, analysts have forecast this to continue.

The company has put some cash to work over the last two years, and at a return on equity of over 27%, investors can expect this to pay off in the long run. Its debt is minimal, and operating cash flow is strong. Its return on invested capital is far above its weighted average cost of capital, meaning that growth in intrinsic value is likely to be strong over the medium to long term.

Some have likened the company to an Australian version of Warren Buffett’s Berkshire Hathaway.

Interestingly, Buffett has been vocal about his intention to buy back Berkshire Hathaway stock when it trades at 1.2 times book value or less. To Buffett, this would mean that the company is trading at a heavy discount to its intrinsic value. Washington H. Soul Pattinson currently trades at 1.27 times its book value. Investors can therefore be reasonably comfortable that there exists a margin of safety at the current share price.

Other measures of value also indicate the company is currently trading at a discount. It has an Enterprise Multiple (enterprise value/EBITDA) of 7.8, where 7.5 is often considered ‘cheap’. It has an enterprise value/net operating profits multiple of 10, where 10 is also considered ‘cheap’. Its current price to earnings ratio is 15.6, lower than it has been since the Global Financial Crisis in 2009.

Foolish takeaway

Quantitative measures of share price value indicate that the company is currently trading at a discount to its intrinsic value. Given the strong financial position of the company, management who have proven to be good capital allocators and a reliable dividend yield, I’d buy Washington H. Soul Pattinson today and hold it for many years to come.

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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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