Under the Spotlight AUS: Washington H. Soul Pattinson and Co. Limited (SOL)

Business history is filled with great rivalries driving innovation, so it may seem counterintuitive to work together with competitors. Yet one of Australia’s oldest listed companies was built on the friendship of entrepreneurs who never opened pharmacies in direct opposition to each other. 

Washington Soul and his father Caleb started in central Sydney in 1872, while Lewy Pattinson began north of the Harbour Bridge in 1886. They cooperated well in the early years, and Soul even let Pattinson share their head office when the bubonic plague prevented access to his own, during the 1890s. 

Pattison later agreed to buy Soul’s business. In January 1903, the now combined Washington H. Soul Pattinson and Company Limited (WHSP) ($SOL) was incorporated and floated on the ASX. Ever since, the same family has actually remained in management at the investment conglomerate that WHSP has become. We’ll get to that.

Broader horizons

WHSP expanded its retail chemist operations for decades and built up significant cash reserves. In 1969 they looked outside the industry and entered a cross-holding agreement with building materials firm Brickworks ($BKW). They originally held just over 40% in each other. The arrangement still stands, although these stakes have been diluted over time and cross-holdings are no longer allowed. 

By 1970, they were ready to take the next step in a relationship with New Hope Corporation ($NHC), an agricultural and resources company in which WHSP has also retained its significant stake. Its coal mining operations in Queensland are a controversial topic today and the risks are likely to grow due to stricter regulations to reduce carbon emissions. Other investments were more forward-looking, like taking an interest in SP Telemedia in the 80s – it would merge with TPG Telecom ($TPG) in 2008. 

And so WHSP shifted from a traditional business into holding shares in various public and private companies. The team makes active decisions about which they buy or sell and the amounts. Despite similarities in structure, it’s neither an ETF nor a Listed Investment Company (LIC), but just an ASX stock. There have even been a few comparisons with the famous Berkshire Hathaway ($BRK) over in the U.S.

The WHSP team takes a proactive approach and often sits on the board of directors of firms, impacting the journeys of these companies over the long term. They’ve been unwilling to cut down on these holdings – a choice that leaves them with little cash for new ventures. 

Recent redirection

Despite its long history, some of WHSP’s most important moves have been rather recent. In 2021, they divested the remaining pharmaceutical business to Wesfarmers ($WES) and entered a merger with Milton Corporation, an LIC with a portfolio of blue chip ASX stocks. This provided exposure to new market areas without WHSP needing to offload its existing holdings – and nearly doubled its multi-billion dollar market cap and number of shareholders. While this presented a neat solution, it will be hard to reproduce in the future. WHSP will need to find other growth strategies to continue to perform throughout various market cycles. 

Half of the funds (49.3%) are invested in a ‘strategic portfolio’ of ASX stocks, including legacy holdings like the three mentioned above; they provided 63.3% of cash flows during H1 2023. However, there are serious concerns about whether TPG’s current business structure is sustainable. Their fossil fuel assets have led to exclusion by more ESG-minded investors, and selling these stakes is likely to be tougher in the future. 

With another 27.6% of their funds invested in ASX large caps, they do have a large exposure to the local market. Picks like Macquarie ($MQG) and CSL ($CSL) have proven successful in this section; the focus is more defensive in nature and has low allocations to high-growth sectors like tech. Most of their remaining money is in alternative assets.

Assorted positions

WHSP also invests in earlier stage companies, private equity opportunities, structured credit and property. These can be harder for the average investor to access directly through the ASX. The team’s been particularly interested in the private lending space with structured credit products, believing this offers good risk-adjusted returns compared to the public market at the moment. With the cash accessed through the Milton deal, this segment grew to $483m in H1 2023 and more projects are in the pipeline. If they keep up this approach, there’s likely to be more changes for WHSP in its next decade. 

The firm has survived over a century with a focus on long-term returns and established an impressive record of dividend payouts since its founding. It’s a diverse offering compared to the usual single company ASX stock, but WHSP ultimately makes the investment decisions. Investors should remember they can’t opt out of specific sectors or businesses, and need to decide whether to come along for all the ups and downs of WHSP’s future. 

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.