The S&P/ASX 200 Index (ASX: XJO) dividend share section of the market has plenty of potential names to choose from. But there's one particular ASX 200 dividend share that I think looks like an exceptional long-term buy at the moment: Brickworks Limited (ASX: BKW).
From the surface, it may seem like a building products business that works in a fairly cyclical industry with relatively low-profit margins.
On that side of things, Brickworks is fairly impressive. It's the leading brickmaker in Australia and the north east of the US. Brickworks also has a number of other building products like roofing, masonry and stone, specialised building systems, timber battens and cement.
But, I don't think it's just an interesting cyclical construction play at this uncertain moment in time. There are a number of growth areas within the business that makes me think Brickworks shares are a top pick.
UK expansion
The existing Brickworks Australian building products business is quality but doesn't seem to have exciting growth potential.
I like the potential for the US segment – it's a huge market and Brickworks has plenty of room to expand there.
For me, a new, compelling side to the business is that it recently announced a supply agreement with Brickability, a leading building products company in the UK, for the sale of bricks into the UK market. It called this a "significant" milestone.
Management called this an "attractive expansion opportunity" with bricks having an 85% share in external walling in housing. Around 10% to 20% of the UK supply is sourced from imports. Brickworks plans to initially supply this market from its plants in the US. It's investigating the feasibility of additional supply from Australian plants.
The 10-year supply agreement includes a minimum purchase quantity of 10 million bricks per year and it hopes to "build on this over time".
Industrial trust
Brickworks has been selling excess land into a joint venture industrial trust that it owns along with Goodman Group (ASX: GMG). It has blue-chip tenants for the buildings including Amazon.com, Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), DHL and Telstra Group Ltd (ASX: TLS).
The ASX 200 dividend share notes there is strong demand for increasingly sophisticated developments, with features at the properties like robotics, automation and multi-storey warehousing. This is helping rental growth and improving the value of the properties.
Completing buildings increases the value of the industrial trust. Brickworks continues to identify land to sell into the trust in the coming years, to support "continued long-term growth."
At the end of FY22, Brickworks had a total of around $1.8 billion across two joint venture property trusts.
Manufacturing trust and other land
It recently announced the launch of a new property trust with Goodman Group, which has a portfolio of 15 of its Australian manufacturing plants. Some of Brickworks' land isn't shown at the true market value on its balance sheet, but the land sales into the property trusts enable the company to demonstrate the true value to investors (and receive a lot of cash).
Brickworks owns 50.1% of this trust.
More of Brickworks' manufacturing plants could be sold into the manufacturing trust over time.
The company also has a 100% interest in over 5,000 hectares of operational and surplus land across Australia and North America. For example, four specific land zones (which don't account for all of the 5,000 hectares) are worth $0.8 billion 'as is' and have a "rezoned" value of $1.3 billion.
It's exploring with Goodman the idea of developing the industrial-zoned 76 hectares of land around its mid-Atlantic brick plant in Pennsylvania.
Investments
The biggest contributor to the underlying value of Brickworks shares is the 26.1% holding of investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Soul Pattinson has a diversified portfolio across a range of industries including resources, telecommunications, financial services, agriculture and so on.
This investment, which is itself an ASX 200 dividend share, has been providing Brickworks with a growing dividend and stability.
The 94.3 million Soul Pattinson shares that Brickworks currently owns are currently worth around $2.6 billion.
Brickworks is also a substantial shareholder of robot bricklaying business FBR Ltd (ASX: FBR). It will be interesting to see how that investment plays out over time.
Strong Brickworks dividend record
Brickworks hasn't cut its dividend since 1976 and it has grown its dividend in consecutive years for almost a decade.
In FY22 it grew its final dividend by 3% to 63 cents per share. After a 10% fall in the Brickworks share price since the end of March 2022, it now has a grossed-up dividend yield of 4.1%.
Brickworks can essentially fund its dividend from the dividend income from Soul Pattinson and the rental profit from the two trusts. Considering the Brickworks share price is at a substantial discount to the underlying value of its assets, I think that the ASX 200 dividend share is an attractive long-term buy for income.
