The Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) share price has been a very strong performer during 2018, it's up by 40%.
As a refresher, Soul Patts is one of the oldest businesses on the ASX, having operated for over a century. It's an investment conglomerate that takes large stakes in businesses it thinks are long-term opportunities.
However, no business is a buy at any price. Here is my buy and don't buy cases:
Buy
Soul Patts may be one of the best buy-and-hold businesses on the ASX. Its long-term investment approach and management style has created very good market-beating returns. Winners usually keep winning.
It has managed to increase its annual ordinary dividend every year since 2000, which is among the best records on the ASX.
Its diverse portfolio of assets suggests that it is a lower risk option compared to many of its ASX-listed peers that focus on a single industry like banking or retail. Its largest holding, TPG Telecom Ltd (ASX: TPM), has done extremely well in the past few months since the merger announcement – this may justify the Soul Patts share price increase.
Not a buy
The share price may have run too hard. I think a good alternative way to value Soul Patts is to look at its dividend yield, which is currently at a low of 2.2% before franking credits, far lower than the average historical yield.
Soul Patts has long traded at a discount to the sum of its parts and the strong price appreciation has eroded this. This is a decent chance this discount may appear again in the future. The higher price you pay the lower your potential returns will be.
There is a possible scenario in the future where TPG suffers due to the NBN, Brickworks Limited (ASX: BKW) hurts from a housing downturn and several of its other holdings decline in an Australian recession all at a similar time.
Foolish takeaway
I believe now is not the best time to buy Soul Patts for market-beating returns. I think it's a quality dividend share but it has gotten ahead of itself. I wouldn't sell but I'm certainly not buying at today's price.
