I think that Brickworks Limited (ASX: BKW) is a retiree's dream at this share price.
It's hard to believe that a business known for building products could potentially be one of the best performing ASX 200 shares this year.
There are plenty of incredible ASX businesses that have performed year after year like Altium Limited (ASX: ALU), Pro Medicus Limited (ASX: PME) and WiseTech Global Ltd (ASX: WTC).
But for those companies to be some of the best performers in 2020 they probably have to get even more expensive. It's possible, but a great business at a good valuation could be the best performer.
What does Brickworks do?
It's split into three (or four) divisions.
One long-running division is its investment division. It has been a major shareholder in investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) for decades. Despite a recent selldown of Soul Patts shares to fund acquisitions, it still owns 39.4% stake in one of the best investment businesses in Australia.
It has a 50% share of an industrial property trust with a net value to Brickworks of more than $600 million. The partnership with Goodman Group (ASX: GMG) has been very profitable so far and the joint venture has recently received approval to commence the 89 hectares development of the Oakdale West Industrial Estate.
The other section is building products. In Australia it has a leading position as a brickmaker, the second largest masonry business, the second largest roof tile business, a precast business and a 33% stake of Southern Cross Cement.
But it recently acquired three brickmakers in the US – Glen Gery, Sioux City Brick and Redland Brick. Combined, these businesses have annual revenue of around AU$290 million from 12 operating brick plants and one manufactured stone plant. Brickworks plans to improve efficiencies & margins in the US and build the business over time.
Why is Brickworks a good choice for dividends and returns?
The Australian housing market had been in a tough place for a year or two over 2018 and 2019. This had a sizeable negative effect on the Australian construction industry. However, this is now turning around and Brickworks is seeing monthly growth for its order book. Higher building products earnings would mean a higher share price, but I don't think the market is expecting as much growth as the company may up creating.
Over the long-term Brickworks continues to grow in Australia. The US is a huge market so Brickworks has opened up a long growth runway there.
In terms of dividends, Brickworks has maintained or grown its dividend every year since 1976, which in some ways is one of the best records on the ASX. Brickworks currently has a grossed-up dividend yield of 4.25%.
The Soul Patts investment and property trust net income alone essentially funds the Brickworks dividend. Those sources of income are defensive and growing.
The value of its 50% stake of the property trust and the Soul Patts shares backs up Brickworks' market capitalisation value – the building products businesses are essentially free for investors. Brickworks looks good value to me.
