Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares represent one of the biggest positions in my portfolio. I also rate it as the safest stock that I own. In this article, I'm going to outline why I think it's so defensive.
For readers who don't know this business, it's an investment house that was listed in 1903. It started as a pharmacy business – which is where Soul Pattinson Chemists got the name – and over time it expanded into the conglomerate that it is today. Impressively, the company has paid a dividend every year since it listed in 1903.
The company has a really diversified portfolio across a wide range of ASX shares, unlisted businesses, industries and asset classes.
Many of the ASX bank shares are struggling in the current environment because of competition – there is little opportunity for them to diversify their core earnings. Soul Pattinson is invested in a wide range.
Areas of significant exposure include telecommunications, resources, building products, financial services, healthcare, agriculture, swimming schools, structured yield/credit and property.
Some of its biggest investments include TPG Telecom Ltd (ASX: TPG), New Hope Corporation Limited (ASX: NHC), Brickworks Limited (ASX: BKW), Tuas Ltd (ASX: TUA), BHP Group Ltd (ASX: BHP), Macquarie Group Ltd (ASX: MQG), CSL Limited (ASX: CSL) and Apex Healthcare.
If there's an issue with a particular sector, the portfolio is diversified so that issue would only impact a smaller portion.
The diversification also means the business is able to look far and wide for the best opportunities to invest in. It's not limited to being a bank, a telco or any other sector. This is very useful to be able to future-proof the business and make itself a relatively safe ASX stock, though the share price does go down sometimes.
Deliberate portfolio construction
A lot of the portfolio is invested in businesses in defensive sectors that generate strong cash flow, which I think makes it a very defensive ASX share.
The company recently said it has been deliberately positioning defensively and building investment capacity – at 31 July 2023 it had $911 million of cash and term deposits.
Many of its investments are fairly uncorrelated to the overall S&P/ASX 200 Index (ASX: XJO), and each other. For example, resource prices can move up and down with little correlation to how the rest of the share market is doing. Swimming school demand could be defensive, as most people will want to learn to swim.
Reasonable dividend payout ratio
Soul Pattinson normally has a relatively conservative dividend payout ratio. It receives investment income from its portfolio, pays for its expenses and then pays a healthy amount of that to shareholders. But, it retains enough cash flow to improve its balance sheet each year and invest in more opportunities.
The company said that its total dividends declared as a percentage of net cash flow from investments for FY23 was 74%. That means it's keeping around a quarter of its cash flow for the long-term benefit of the company.
Making additional investments every year increases the compounding power of the portfolio over time.