Letting go of Soul Pattinson

Washington H. Soul Pattinson can trace its origins over a century. In more recent times, it has been an active investment vehicle with large stakes in selective businesses.

Over the past 40 years, those investments have returned over 17% per year, an outstanding return that has been tested by cycles, crisis and fads.

Since 2007, it's been repeatedly on our Buy list, only to be slapped with a Sell six months ago.

Back then, we noted that the soaring share price had narrowed a long apparent gap between price and value. In addition, there were meaningful changes affecting some of its largest investments.

TPG Telecom's audacious merger with Vodafone Hutchinson Australia is being heavily scrutinised by the competition regulator and, if knocked back, could send the strategic direction of the business back, particularly since it has been forced from its mobile strategy.

Brickworks has just made a large, ambitious foray into the US with the purchase of the fourth largest brickmaker in America. It's expecting to make further acquisitions, thereby expanding its least attractive division.

And New Hope, beset by all the controversies that accompany coal mining, awaits a crucial approval to expand its New Acland mine. Without the approval, that mine will close by 2020.

Through all this turmoil, Soul Patts continues to patiently search for value, back strong management teams and pay generous dividends. 

Along with Ramsay Healthcare, it's one of just two companies that boast a 20-year record of ever-growing dividends. With diversified earnings, net cash on its balance sheet and deeply rooted conservatism, we doubt that will change any time soon.

The quality of the business has never been in contention. It's price, on the other hand, requires reflection. 

Even by its own counting, a pre-tax sum of parts valuation gets to about $25 a share. Include tax payable and some corporate costs and the value falls to about $17 a share. Today's share price of over $28 does appear to fully value the business. 

For many long-term investors, paying a premium for the management and track record of Soul Patts will be worth it. Holding the stock at these levels is a perfectly fine decision.

For us, however, each investment must fight for its place and better opportunities may beckon. We're raising our Sell price from $22 to $25 to reflect the strong performance of its large investments, but with the share price now exceeding net asset value by a fair margin, we're sticking with SELL.