Washington H. Soul Pattinson (ASX:SOL) LIC Review

Washington H. Soul Pattinson is an actively managed investment conglomerate that can be traded on the Australian Stock Exchange. Strictly speaking it isn’t a Listed Investment Company (LIC), but with a market capital of over AUD $5.5 Billion and proven track record for investors, it is one of Australia’s largest publicly listed companies and a member of the ASX100.

It is actually the second oldest listed Australian company having been first listed on the Sydney Stock Exchange in 1903. WHSP have been producing returns for their shareholders for over 100 years, and have amazingly been managed by the same family for generations.

This article will provide an overview of the WHSP (ASX:SOL) Listed Investment Company and explore its structure, management, holdings, past performance and fee structure to explore whether I will personally add it to my ‘FI Portfolio’.

“WHSP holds a diversified portfolio of uncorrelated investments across listed equities, private equity, property and loans. Its flexible mandate is a key advantage to generating returns by allowing WHSP to make long-term investment decisions and adjust the portfolio by changing the mix of investment classes over time.”

Washington H Soul Pattinson
Washington H. Soul Pattinson WHSP (ASX:SOL)

Washington H. Soul Pattinson WHSP (ASX:SOL)

WHSP first started as a Sydney pharmacy way back in 1872, and has since grown into one of Australia’s largest diversified investment companies managing over AUD $5.5 Billion. WHSP operates with a long investing time frame, and has a strong focus on producing value and capital growth to shareholders through mergers and take-overs.

WHSP also has a strong commitment to increasing their dividend payments to shareholders – they have done so continuously for the past 20 years (matched only by one other Australian publicly traded company – Ramsay Healthcare).

“Our objective is to deliver superior returns to our shareholders by creating capital growth along with steadily increasing dividends. Dividends are paid out of the cash generated from our investments

Washington H. Soul Pattinson investing objective statement

Details of Washington H. Soul Pattinson WHSP (ASX:SOL)

“WHSP is a significant investment house with a portfolio encompassing many industries including its traditional field of pharmaceuticals, as well as mining, building materials, property investment, telecommunications, financial services and other equity investments.”

Washington H. Soul Pattinson

Washington H. Soul Pattinson WHSP (ASX:SOL) hold three significant individual company holdings, as well as a number of unique portfolios that are strategically designed to be non-correlated and thus allow WHSP to take advantage of counter-cyclical investments.

Similar to a traditional portfolio construction, this lets WHSP to invest in ‘unpopular’ assets at different stages of the economic cycle – essentially to let their fund managers better take advantage of ‘value investing’ for long term investments.

WHSP do have a small portion of debt which they use to invest in the portfolio, which is negligible at currently under AUD $200 million or under 3.7% of the portfolio net value.

Washington H. Soul Pattinson WHSP (ASX:SOL) top holdings

The top holdings of WHSP make up over two thirds of their entire fund, and are;

  • TPG Telecommunications Limited (Telecom) – ASX:TPM – 31%
  • Brickworks Limited (Construction) – ASX:BKW – 24%
  • New Hope Corporation Limited (“Clean” Coal) – ASX:NHC – 14%

In my opinion, this presents a bit of a concentration risk and goes against the common wisdom of the benefit of diversification, with only the remaining 31% of the company being made up of other diversified ‘themed’ portfolios. WHSP do hold substantial voting rights in the management of these companies as a result of their large shareholdings, so are able to influence the direction of these companies.

I also find it a little confusing that WHSP have a number of cross shareholder ownership deals – for example WHSP owns shares in Brickworks (ASX:BKW), and there is a reciprocal holding as Brickworks also owns shares in WHSP (ASX:SOL), and the same deal for Milton (ASX:MLT) on a smaller scale.

This is more common than you might think (especially in places like Japan and Germany) where it is used as a business management / relationship tool to try and promote cooperation and prevent take-overs between companies. I’m still not fully 100% over the implications of cross shareholder ownerships, but the board of directors of all of the companies involved seem to repeatedly assure shareholders that it is a good thing

All Washington H. Soul Pattinson WHSP (ASX:SOL) holdings

The entire WHSP portfolio consists of the following companies and portfolios;

  • TPG Telecommunications limited (ASX:TPM)
  • Brickworks limited Listed Investment Company (ASX:BKW)
  • New Hope Corporation Limited (“Clean” Coal) (ASX:NHC)
  • Financial Services Portfolio (including Milton MLT and Brickworks Investment BKI)
  • Pharmaceutical Portfolio
  • Round Oak Minerals
  • Large Caps Portfolio
  • Small Caps Portfolio
  • Private Equity Portfolio (unlisted assets)
  • Property Portfolio
  • Cash and other net assets
Washington H. Soul Pattinson WHSP (ASX:SOL)
Washington H. Soul Pattinson (ASX:SOL) portfolio sectors (as of Jan 2020). Source: WHSP 2020 half year report
Washington h. Soul Pattinson (ASX:SOL) portfolio holdings (as of Jan 2020). Source: WHSP 2020 half year report

Performance of Washington H. Soul Pattinson WHSP (ASX:SOL)

WHSP has had significant share price growth over the past 20 years (capital appreciation) of approximately 13.2% annualized growth each year, and currently has a market capital over AUD $5 Billion with 239,395,320 individual shares outstanding.

Washington H. Soul Pattinson WHSP (ASX:SOL)
Twenty year capital growth performance of WHSP (ASX:SOL). Source: Google finance

Washington H. Soul Pattinson WHSP (ASX:SOL) has also had a pretty impressive 20 year track record of increasing dividends, and in the century that it has been listed it has never once failed to provide a dividend to shareholders.

Washington H. Soul Pattinson WHSP (ASX:SOL)
Washington H. Soul Pattinson WHSP interim dividend growth. Interim dividends are dividends given out from retained (last years) earnings. Source: WHSP 2020 half year report

The 2019 total Dividend was 58 cents per share and the 2020 estimated dividend is 59 cents per share; at the time of writing the share price is AUD $21.3, putting the dividend yield at approximately 2.8%, which is also fully franked so ‘grosses up’ to a grossed dividend yield of about 4% which is pretty good!

Washington H. Soul Pattinson WHSP (ASX:SOL)
Washington H. Soul Pattinson WHSP total dividend payouts. Source: WHSP 2019 annual report

This dividend historically represents about 80% of total cash earnings, where WHSP retain the remaining 20% to reinvest into the company as well as retain it for smoothing future dividends.

It was observed in this report that in order to continue its track record of increasing dividends, that WHSP may have resorted to paying out more dividends than it actually generated in 2019/2020. Dividends were increased by 1 cent per share (about 4%).

Critics say they paid out more than they earned so they could keep the title of ‘increasing dividends for over 20 years’, in an attempt to maintain a positive view of management and keep the share price high (and growing). Whilst a positive PR exercise in the short term, paying out more dividends than you generate could be an early sign that this increased dividend is unsustainable and may correct down in future years.

Washington H. Soul Pattinson WHSP (ASX:SOL) vs index

Comparing Washington H. Soul Pattinson WHSP (ASX:SOL) to a Vanguards standard Australian index fund VAS shows that the capital appreciation of SOL has been higher than VAS over the past ten years.

WHSP (ASX:SOL) vs Vanguard Australian Shares (ASX:VAS)
WHSP (ASX:SOL) vs Vanguard Australian Shares (ASX:VAS). Source: Google finance.

When we factor in reinvested dividends the graphs show a significant deviation, showing the great performance WHSP has had over the past 20 years

Washington H. Soul Pattinson WHSP (ASX:SOL) vs All ordinaries Accumulation index (dividends reinvested)
Washington H. Soul Pattinson WHSP (ASX:SOL) vs All ordinaries Accumulation index (dividends reinvested). Source: WHSP 2020 half yearly report

On the 31st of Jan 2020, the WHSP share price was trading at AUD$ 21.55 per share – with 239,395,320 shares outstanding this gave it a market cap of AUD $5.159 Billion. At the same time, WHSP quoted a (pre tax) NTA of AUD $5.5 billion; indicating a 6% discount of share price to its Net Tradable Assets – sounding like good value?

Historical information of NTA to share price is a bit difficult to find for WHSP and does not seem to be a key metric the companies management likes to report on.

Management fees of Washington H. Soul Pattinson WHSP (ASX:SOL)

Now quite frankly this is an interesting point – WHSP does not charge a management fee to its shareholders. This is because, technically speaking, it is not a Listed Investment Company. WHSP is an investing conglomorate – very much similar to Warren Buffets Berkshire Hathaway – infact, WHSP is often referred to within the investing community as ‘the Australian version of Berkshire’

Of course, WHSP does have substantial accounting and management fees as they need to administer and keep track of a very broad number of their investments (including significant commercial property investments), but this is not directly quantified nor passed onto shareholders. WHSP release annual reporting which details costs such as directors salaries and costs, but in my opinion it would be very difficult to quantify this in such a way that you could compare it to conventional ETFs or LICs.

Management of Washington H. Soul Pattinson WHSP (ASX:SOL)

Incredibly, WHSP has been managed by the same family for generations. The Millners also own substantial holdings inthe company (over AUD $1B) which is reassuring for shareholders to know that the managers and directors have substantial ‘skin in the game’

Would I own Washington H. Soul Pattinson WHSP (ASX:SOL)?

WHSP is an attractive investing conglomerate. They hold good profitable companies with solid business fundamentals, have a proven track record of increasing dividend yield, as well as actively producing good capital growth through mergers, acquisitions and start ups.

So would I personally own WHSP for my ‘FI portfolio’? The answer might be confusing but it is both a No and a Yes.

No, I will not personally be buying direct shares in WHSP (ASX:SOL). Personally, I see buying shares in WHSP as akin to stock picking and I may as well be buying shares of TPG (ASX:TPM) and Brickworks limited (ASX:BKW) since these two companies make up over half of WHSP’s entire holdings. I personally favor an index style approach as is championed in the FIRE investing community.

However Yes, it IS already in my portfolio… how can this be?

The answer lies in the fact that WHSP is not actually a Listed Investment Company – it is an Investing conglomerate. This means it is not exempt from being included in ETFs, and just gets treated as a regular company and included in the index.

If my reasoning is correct here too, this also sneakily gives the LICs that is directly holds (BKI and MLT) a little backdoor into the ETF too – but of course these end up being a very small proportion of the entire fund.

Currently, WHSP makes up about .15% of the Betashares A200 fund which tracks the Solactive Australia 200 Index. WHSP (ASX:SOL) sits currently at around number 104 out of 200 Australian listed companies by market cap (the solactive index is slightly different to the S&P index).

This means any investor who buys an Australian ETF index fund like VAS or A200, is also indirectly a shareholder of WHSP!

Summary of Washington H. Soul Pattinson WHSP (ASX:SOL)

Washington H. Soul Pattinson WHSP (ASX:SOL) is an investing conglomerate fund that focuses on returning an increasing dividend to its shareholders as well as solid capital growth. It has a high concentration risk with three companies (TPG Telecom, Brickworks construction and New Hope coal) making up over two thirds of its portfolio, with the remaining third being a diversified mix of financials, property and unlisted (private) assets.

It does not charge investors a management fee, has been managed by the same family for generations and has over 100 years of dividend history with a 20 year track record of increasing dividend yields. Whilst I do not own WHSP directly, I own it through my index funds and am glad to see it make up a small percentage of my portfolio.

Time will tell whether their substantial holdings in “clean coal” (branding by their social media marketers) will prove a prudent investment, but this is a point of contention for many potential investors.

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