Company Interview / Soul Patts' plan to join the "Dividend Aristocrats"

Todd Barlow, CEO of Washington H. Soul Pattinson (ASX:SOL) reports a 28% drop in full-year profit to just under $500 million, attributing this to lower contributions from Brickworks (ASX:BKW) and New Hope (ASX:NHC). Despite this, net asset value rises 9% to $11.8 billion and net cash inflow increases over 10% to $468 million.

Todd notes the company's strong cash flow generation, which drives a 9% increase in total dividend payments to $0.95 per share, fully franked. He highlights the 13.5% growth in the portfolio over three years, emphasising that the Milton acquisition bolsters portfolio diversification, especially in private markets.

Looking ahead, Todd discussed the company's active deal-making and diversification strategy. He acknowledges the short-term impact of higher interest rates on P&L but remains optimistic about long-term shareholder returns and dividend growth, aiming for Soul Pattinson to join the ranks of the Dividend Aristocrats.

Full unedited transcript below:

0:00

So Potts has reported a 28% drop in full year profit to just under $500 million, the decline reflecting lower profit contributions from Brickworks and New Hope within its strategic portfolio. Net asset value jumped 9% to $11.8 billion, and net cash inflow increased more than 10% to $468 million. Total dividend payments jumped more than 9% to $0.95 per share, fully franked. And joining me now to discuss is Soul Part CEO Todd Barlow. Todd how much I guess, did you see the impact of new Hope and brickworks on this decline in profit?

0:37

Thanks very much for having me. Uh, so when we look at our results, we don't really focus on PNL. We're an investment company. It's all about the cash flow that we generate, which is what we use to pay higher dividends to our shareholders. That was up 10% for the year, uh, which meant that, uh, dividends overall increased by 9% on the previous year. Uh, and the total return of the portfolio was up 12% for the year. So a very, very solid result. So a solid result in terms of those metrics. And the portfolio, as you said, grew by 8.7%. What does that represent in terms of overall overall return, I should say for the year?

1:15

Yeah. So when we add back the dividends, that's how I get to the 12%. Uh, so the portfolio value at year end was $11.8 billion. So that's, you know, very credible result, um, over three years where we've grown the portfolio by 13.5% on a total return basis, that's 6.4% better than the market. Uh, so it's really been a great three years for us ever since we did the Milton acquisition. Uh, and if I think about that 6.4% compounding over three years, we've added over $2 billion of additional value to shareholders on top of market growth. So how pivotal has that acquisition, which, as you say, has been three years now been for the overall company?

1:56

Well, apart from the fantastic results that we've done in terms of total return, uh, the cash flow generation has been a lot stronger. Uh, the cash flow generation has grown at 20% per annum for three years. That's enabled us to really increase dividends at a rate of 15% per annum for three years. But more importantly, we've de-risked the portfolio by adding more diversification through further uncorrelated asset classes, particularly in private markets like credit and private equity. So, Todd, what is the forward looking path then for soul Patts as you try and look towards these longer term strategic and investment objectives?

2:36

Yeah, it's really more of the same for us. Um, you know, I think we're starting to see, uh, a lot of deal flow come our way because, uh, you know, deal flow begets deal flow. And we've been so active for three years that we're seeing a lot of activity. Uh, and that means that we're in a position to take advantage of great opportunities as they come to us. Uh, we are carrying cash, and we just did a little capital raise to top up our cash balances. Uh, that means that we're in a position to a liquid position to act on these opportunities as they come. Um, and our portfolio, we set up to be resilient through any market cycles so we don't, uh, fear what comes at us. Uh, we've been through many cycles in the past, and, uh, have managed to be able to outperform the benchmark for many, many years. So speaking of economic cycles, we know that in in terms of the overall housing market and even the new brickwork, CEO himself has said that upturn is at least a year off. Just getting back to my earlier question, the impact of brickworks on the overall bottom line for soul parts.

3:37

Yeah, the bigger impact that we saw in terms of our PNL last year came through from the devaluation of brickworks property assets, more so than the, uh, construction cycle itself. Uh, and that was really just a reflection of higher interest rates. Uh, you know, in the last couple of years. I would still think that industrial property is a really good asset class. Um, as against any other property asset class, we're seeing higher rents. It's very top quality, uh, portfolio of locations that brickworks is invested in. Uh, but, uh, you know, we saw expanding, expanding cap rates in industrial property. And that was what really impacted the PNL last year. Is there any further, I guess, acquisitions in the pipeline? Todd, as you start to grow the portfolio more?

4:25

I think we'll continue to be active. I mean, last year we deployed $2.8 billion into, uh, new new deals and, uh, and new assets across the portfolio. Uh, you know, that might be a little bit more active than what we expect. Uh, but I would suggest that, uh, you know, we're not going to stop investing. We're still seeing really great opportunities coming to us. And there's always a great opportunity for us to, uh, regenerate the portfolio by, uh, selling your least favorite thing to to fund the acquisition of something new. Now, we mentioned the dividend up by more than 9%, $0.95 per share, fully franked. Shareholders will be loving that. Can they expect that kind of growth in full year 25?

5:07

Well, it's going to be hard to maintain that level of growth. I mean, in the last three years, as I said, we've grown the dividend at 15%. If I think about the the market growth of dividends across that three year period. The market has only grown dividends at a 0.9 of a percent rate. Uh, so we we've done particularly well in really stepping up our, our dividend. Uh, but if I look forward to another year and we are in a fortunate position where we can increase dividends again next year, that will be 25 years of continuous growth. That will put us into the the class of the Dividend Aristocrats, which is a global thing for, uh, companies that increase dividends every year for 25 years and will be Australia's first. So what's the likelihood of that being achieved, Tod?

5:54

Well, I'm, uh, positive and optimistic. I think, uh, the cash flow generation that we're seeing across the portfolio is very strong. Uh, we've deployed $500 million through last year into credit that that portfolio is generating nearly 15% cash yield. Um, and, uh, and as that continues to grow, the cash from that portfolio itself will be very strong. And we'll also see some growth in, in, uh, the income that we received from our private equity portfolio as well. Now, I know you can't control the market, but those who have held your stock for some time have done very well over the past year, though it hasn't really gone anywhere and I guess underperformed. Um, some of your peers as well. Do you think that you have been unfairly valued or where do you see further market value for soul patts.

6:43

Well, one thing that we say to our shareholders is take a long term view. Uh, you know, obviously our aim is to generate great results year on year. Uh, and if we look at the 20 year history, we've generated, uh, total shareholder returns that have been 3% above the benchmark. That means that an investment in souls over 20 years is almost doubled, an investment that, um, uh, met the benchmark.

7:06

Um, there will be short term fluctuations in our share price. But, you know, when you do a year where dividends are up 9% and the total return of the portfolio is up 4%. Um, you know, it's hard to, uh, hard to be too worried about that. How are you going in the overall business, though, when we know interest rates are likely to stay higher for longer, there is the challenging that so many CEOs say economic cycle. Um, do you need to fine tune your staffing costs or any other business costs? How is the overall business looking as we head into full year 25?

7:42

Well, for our business, we run an incredibly lean team. Um, we, you know, we obviously need to to pay good people, uh, to do the work that they do. Um, but the overall cost of our business is about, uh, 0.4 of a percent of the portfolio value. Uh, so our business is incredibly lean for the output, uh, and the turnover that we do. Um, but, you know, we're conscious of the impact of interest rates and inflation, inflationary costs on the bottom line of the invested companies that we have, uh, and the investments that we're making. Um, you know, I wouldn't say that interest rates are at historically high levels. Um, but there's no doubt that, um, the consumer is is hurting a little bit. And that's starting to show up in some of, uh, particularly the, uh, discretionary consumer businesses that, that are out there. But I would say that we tend not to invest in those sorts of businesses. We're in, uh, you know, much more resilient, defensive, uh, businesses that, uh, uh, work throughout the

8:41

cycle, uh, and over the long term. And I guess, speaking of resilience, Todd, if you can just give us an update on how you've been faring in the early months of full year 25,

8:53

well, it's been a choppy environment, uh, to invest in, in the last couple of months with, uh, particularly through reporting season. Uh, there's been some ups and downs. But, you know, if I look at, uh, today, uh, you know, the brickworks result has been very well received by the market. Uh, and their share price is up significantly. Uh, there's also some speculation around a result at the, uh, on Tpg's fibre assets. And Tpg's share price is also up. Uh, so, uh, we're having a very good day.