This article was first published in the Winter 2023 edition of Listed@ASX
Washington H Soul Pattinson and Co’s commitment to diversification and returns makes it a standout on the bourse, as it marks its bidecacentenary – 120 years – on ASX.
Celebrating 120 years as a listed investment on ASX is a fitting time to explore the factors that have led to Washington H Soul Pattinson and Company’s longevity. Aside from being a market veteran, the business is also a huge modern day success story.
For many, the name “Soul Patts” is synonymous with pharmacies and that is where the business has its roots. Today, Washington H Soul Pattinson and Company has moved away from its traditional investment in Australian pharmacies and has matured into a diversified investment business whose portfolio is exposed to the mining, building materials, property investment, telecommunications and financial services sectors. A promising new foray into structured credit demonstrates its forward-looking perspective.
“Although the company has been listed for 120 years, we have evolved significantly over that time. We started out with a small number of pharmacies and the principles that underscored what we stood for back then are as relevant now as they ever were,” says managing director Todd Barlow.
“Our belief in being diversified has helped the business weather various cycles including the Great Depression, two World Wars, the 1987 stock market crash and the GFC. We’ve also always looked to invest in low cost businesses, which maximises profits in good times and provides an excellent risk mitigant in down times, when high-cost operations struggle,” he adds.
“Our belief in being diversified has helped the business weather various cycles including the Great Depression, two World Wars, the 1987 stock market crash and the GFC.”
Barlow says WHSP’s old-fashioned values of doing the right thing and looking after its people and the communities in which it operates has led to its success. “We think for the long term. And over the long term, your reputation is everything.”
This commitment to strategic, long-term decision making is evident in WHSP’s strategic portfolio’s holdings. “While they are quite large, ASX-listed companies today, the majority of these companies started out as private equity investments inside Soul.”
As an example, WHSP invested in resources group New Hope as a private equity investment, which provided growth capital for an Indonesian coal mine. It also invested in telco TPG back when it was a distressed television station.
“It’s been an interesting journey for both these companies to get to where they are today. We think of our business as an incubator for companies like these. We are always developing the next meaningful addition to the portfolio to ensure we stay relevant and rejuvenate the business.”
A current focus is building the private equity portfolio’s assets. A showcase asset for this part of the portfolio is emerging electrical engineering business Ampcontrol, which has an opportunity to take advantage of the transition to renewable energy. “A significant amount of money is going to be spent on the transformation of the energy grid, remote power and electrification. That’s an exciting business,” says Barlow.
WHSP also maintains significant investments in agriculture, “A great Australian industry” and financial services. “One of our investments is Ironbark, which is in wealth management and creates products for financial adviser networks. We’re keeping our eyes out for any opportunities to significantly grow businesses inside attractive, long-term industries.”
Although it’s structured as a listed investment company, WHSP isn’t an LIC in the strictest sense. LICs are tightly defined in Australia from a tax perspective, which imposes constraints on their activities. They also tend to be a single asset class, either Australian equities, large caps or global equities. Whereas WHSP gives shareholders access to a variety of asset classes, not just large cap equities, but also small cap equities, private equity, credit and direct property.
“The opportunity to invest across asset classes provides us with a lot more flexibility to invest where we see value. It also reduces the risk in the portfolio because the business is not exposed to just one asset class. This diversity is attractive because many investors don’t have easy access to these asset classes and generally don’t have a big allocation to them. Most are overweight local equities,” says Barlow.
“The way we look at it, we have set ourselves up to be a listed version of what you would see in sovereign funds, family offices or superannuation funds, which tend to invest across multiple asset classes. And the reason they do that is because it increases returns and reduces risk over the long run. WHSP is set up to be differentiated from any other listed company to provide all that in one place. It’s access to a model portfolio through one share,” he adds.
Traditionally a tightly-held stock, there are now 60,000 shareholders on the register, mostly retail investors. Many are very long term investors who have inherited WHSP shares from their parents or grandparents, or whose parents bought shares in their name as a child as a cornerstone of their portfolio. So there is an intergenerational appreciation of the value of WHSP shares, given its strong performance over the years and exemplary dividend record.
The business has always paid a dividend to recognise many of its shareholders are retirees and rely on the cash flow to fund their lifestyle. “So it’s really important to provide stability in our dividends,” Barlow says.
It also makes sense to pay out a high proportion of cash flow as dividends given Australia’s dividend amputations scheme. “We try as much as we can to provide 100 per cent fully franked dividends. We have a really proud history of never missing a dividend since we listed, even during difficult parts of the cycle over the last 120 years. Lately, we have had a stellar record of increasing our dividend every year, while at the same time providing total returns that exceed the market. We are on a 23-year roll of increasing our dividend every year, the only company to achieve this.”
In fact, WHSP has just announced a 24 per cent rise in the interim dividend. “That sends a really strong message to the market that we feel really good about the cash we’re generating and the outlook for our ability to pay dividends.”
The stock appeals to retail investors because of its diversification benefits and reliable dividend. But that could change, says Barlow: “We hope in time we’ll become more attractive to active fund managers who want access to asset classes in which they can’t directly invest. The way we are setting up the portfolio will become quite attractive to lots of different pockets of the investing community.”
The number of shareholders on the register has increased in recent years, in part as a result of the merger in 2021 with another veteran listed investment vehicle, Milton – a $3.7 billion portfolio with a similar investment approach. “When I started in this role in 2015 we had fewer than 10,000 shareholders on the register. That grew to 30,000 shareholders at the time of merging with Milton, which also coincidentally had 30,000 shareholders. Together, we now have 60,000 shareholders,” he explains.
Shareholder numbers have also grown as WHSP has stepped up its investor relations activities. “We used to pride ourselves on flying under the radar, taking the view we had long-term supporters and that was enough. But for a variety of reasons, we thought it appropriate to develop our investor relations program,” Barlow adds.
WHSP has expanded its Investor Relations (IR) activity in a more significant way since the merger with Milton, especially with the recent appointment of Courtney Howe as the new head of IR.
“We recognised half our register were not people who necessarily bought Soul Patts’ shares, but who ended up owning us through the merger. We had to explain why Soul Patts provides superior returns to an LIC and decreases risk through the cycle and how we have been able to deliver out-sized returns and growing dividends over time. That was the genesis for our series of shareholder briefings last year,” he says.
Re-engaging the existing shareholder base has also been a priority. “Although many shareholders have owned us for a long time, it’s important they also understand how the business is evolving. This includes making new private equity investments and the growth of the new structured credit portfolio. This has been really positively received.”
WHSP is essentially a family business and this culture permeates everything it does. “Our culture has developed over a long period, facilitated by Robert Millner, who is among the fourth generation of his family to serve the company. We also have a number of loyal people who have stayed with the business for a long time,” says Barlow, who is approaching 20 years with the business.
“When you have that longevity, it’s easy to maintain the culture. We have also structured the business in such a way that it’s all about the team maximising the whole rather than individuals focusing on the parts,” he adds.
For instance, its incentive program is designed to reward working together and generating outcomes that are aligned with shareholder outcomes. “Shareholders win when every part of the business is aligned. The Soul Patts way of investing is to back good people, make disciplined, common sense decisions, invest for the long term and not follow the masses.”
In an era in which ESG is an area of global focus, WHSP has a natural competitive advantage. As a business that’s 120 years-old, it has long demonstrated its sustainability credentials.
“We always think about the long-term outlook for the industries in which we invest. In addition to thinking about sustainability, we’ve also been very focused on our social licence. We invest heavily in the people who work for us, the communities in which we operate and in the environment,” says Barlow.
New Hope is an example. The company was best-in-class in the way it rehabilitates the land it mines long before ESG became a significant trend in thermal coal. It’s also best-in-class in workplace safety, not just around prevention of injuries, but also in terms of looking after people’s mental health and wellbeing. “This has always been a big focus and that’s made us successful,” he notes.
Barlow says it’s frustrating to see ESG become about divesting assets in certain industries. “Our view is that’s not particularly useful because these industries still exist. All this does is push those industries into the hands of offshore parties and people who don’t have a focus on being responsible owners and operators of assets. We think we are the best people to own these assets. In terms of thermal coal, this means managing the asset through the energy transition that will happen and making sure we do a great job of looking after our people, communities and the environment.”
Barlow says the future looks promising. “We’ve been through a long period where the markets have been running quite hard and it has favoured the momentum trade and growth stocks have outperformed value stocks. It’s been hard for value investors like ourselves to keep pace with that kind of strength. But we’ve managed to hold our own and our results are excellent. Generally, we do better when the market is down.”
He says WHSP is well positioned to weather a more volatile market in coming years. “Over that period, we’ll continue to build our private equity and structured credit portfolios. These asset classes are interesting because investors want them and they present great opportunities in the current market.” The structured credit portfolio has been a priority for the business over the past 18 months, with assets under management growing to more than $1 billion in this time.
Barlow concedes there are always threats to manage in the operating market, some of which are increasing. “But if any of those were to eventuate, we are in a stronger position than the rest of the market by virtue of having a more defensive portfolio. We also have cash to take advantage of any significant market selloff. We have asset classes that are less correlated to equities. Plus, areas such as agriculture and credit are not necessarily impacted by a drop in earnings or the share market.”
It’s a formula that has proven itself many times, one that is producing an ever-growing group of long-term investors who are more than happy to keep their money safe with Soul Patts.
This article was first published in the Winter 2023 edition of Listed@ASX.