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Why Soul Patts (ASX:SOL) is up 90% this year and could go higher

We usually expect big movements in share price for smaller, more speculative companies. But not for a boring old investment conglomerate like Washington H. Soul Pattinson and Co. Ltd  (ASX: SOL).

Shares of Soul Patts have been flying. In the last 12 months, shareholders have earned a return of 88% including dividends, closer to 90% including franking credits. So what’s going on?

History

For a long time, Souls has traded at a discount to its NTA. This occurs for various reasons, but the point is, it was persistently discounted by the market. Most likely due to its cross-ownership structure with Brickworks Limited  (ASX: BKW), where each company owned a bit over 40% of the other. My understanding is this goes back decades and was done to prevent attempted takeovers.

Performance

Over the last 12 months, the businesses in Souls portfolio have shot up in value. Brickworks is up 26%. New Hope Corporation Limited  (ASX: NHC) is up 90%. And TPG Telecom Ltd  (ASX: TPM) is up 42%. Soul Patts also has a growing portfolio of financial services companies and numerous other business units that have been doing well.

To give some context to how great a company this has been, over the last 40 years, Souls has returned 16.7% per annum to shareholders. That’s huge compound growth in anybody’s language.

Today

The discount to NTA has now closed and shares are likely trading at a small premium. In the recent presentation, Souls noted NTA per share was over $27 at the end of August. With the share price now pushing over $30, it seems likely that shares are now trading at a premium.

A few people have already suggested selling based on this factor alone. I don’t buy it, and here’s why…

It could be argued that Souls deserves to trade at a premium because of the long-term wealth creation by the company. Management has real skin in the game and is careful with shareholders capital.

Besides, if you’ve doubled your money with Soul Patts over the last year or so, you’ll likely be paying around 20% capital gains tax to sell up and invest elsewhere. I’m fortunate enough to be in this position, and I’m not selling a single share.

Personally, I don’t think it’s smart to pay 20% tax, just because a company may be 10% overvalued. That’s especially true when you consider the company could simply keep performing well and deliver market-beating returns as it has decade after decade.

Foolish takeaway

This is a high quality diversified business with a great history, which spits out increasing dividends year after year. In my view, a great example of a true bottom drawer stock.

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Motley Fool contributor Dave Gow owns shares of Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks and TPG Telecom Limited. 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 Scott Phillips.

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