Financial News
ASX 200, a dividend with most potential?
The dividend share sector of the S&P/ASX 200 Index (ASX: XJO) has a plethora of possible companies to pick from. But there is one ASX 200 dividend stock that I believe is a great long-term investment right now: Brickworks Limited (ASX: BKW).
On the surface, it appears to be a building supplies company operating in a somewhat cyclical industry with poor profit margins.
Brickworks is quite impressive in this regard. It is the largest brick manufacturer in Australia and the northeastern United States. Other building items available from Brickworks include roofing, masonry and stone, specialized building systems, timber battens, and cement.
But, in this uncertain time, I don’t think it’s just a fascinating cyclical construction play. Brickworks shares are a high option for me because the company has a number of growth opportunities.
Expansion into the UK
The present Brickworks Australian building goods firm is of high quality, but it lacks interesting expansion prospects.
I appreciate the potential for the US market – it’s a massive market with plenty of room for growth for Brickworks.
For me, a fresh and appealing aspect of the company is the recent announcement of a supply arrangement with Brickability, a leading construction materials company in the UK, for the sale of bricks into the UK market. This was referred regarded be a “major” milestone.
With bricks accounting for 85% of external walling in houses, management described this as an “attractive expansion prospect.” Imports account for 10% to 20% of the UK supply. Brickworks intends to first supply this market from its US factories. It is looking into the possibility of obtaining extra supplies from Australian plants.
The 10-year supply agreement calls for a minimum annual purchase amount of 10 million bricks, with the goal of “building on this over time.”
Industrial faith
Brickworks has been selling surplus land into a joint venture industrial trust that it co-owns with Goodman Group (ASX: GMG). Amazon.com, Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), DHL, and Telstra Group Ltd are among the buildings’ tenants (ASX: TLS).
The ASX 200 dividend share says that there is high demand for increasingly advanced developments, such as robotics, automation, and multi-story warehousing. This promotes rental growth and increases the value of the properties.
Building completion raises the worth of the industrial trust. Brickworks is still looking for land to sell into the trust in the future years in order to enable “continued long-term expansion.”
Brickworks owned a total of approximately $1.8 billion in two joint venture property trusts at the end of FY22.
Other land trusts and manufacturing trusts
It recently announced the formation of a new property trust with Goodman Group, which owns 15 of its manufacturing units in Australia. Some of Brickworks’ land is not reported on its balance sheet at its full market value, but land transactions into property trusts allow the company to showcase its true worth to investors (and receive a lot of cash).
This trust is 50.1% owned by Brickworks.
Over time, more of Brickworks’ manufacturing plants could be sold to the manufacturing trust.
In addition, the corporation owns a 100% stake throughout over 5,000 hectares of operational and excess land in Australia and North America. For example, four distinct land zones (which do not account for all 5,000 hectares) are worth $0.8 billion “as is” and $1.3 billion “rezoned.”
It is discussing with Goodman the possibility of developing the 76 hectares of industrial-zoned property surrounding its mid-Atlantic brick facility in Pennsylvania.
Investments
The largest contributor to the underlying value of Brickworks shares is investment conglomerate Washington H. Soul Pattinson and Co. Ltd’s 26.1% stake (ASX: SOL).
Soul Pattinson’s portfolio is diverse, including industries such as resources, telecommunications, financial services, agriculture, and others.
This investment, which is a dividend share on the ASX 200, has provided Brickworks with an increased yield and stability.
Brickworks’ current holdings in 94.3 million Soul Pattinson shares are valued at around $2.6 billion.
Brickworks is also a major shareholder in the robot bricklaying company FBR Ltd. (ASX: FBR). It will be interesting to watch how that investment pays out in the long run.
Brickworks has a solid dividend history.
Brickworks has not decreased its dividend since 1976, and it has increased its payout for nearly a decade in a row.
It increased its final dividend by 3% to 63 cents per share in FY22. After a 10% drop in the share price from the end of March 2022, Brickworks now has a gross dividend yield of 4.1%.
Brickworks’ dividend may effectively be funded by the dividend revenue from Soul Pattinson and the rental earnings from the two trusts. Given that the Brickworks share price is trading at a significant discount to the underlying value of its assets, I believe the ASX 200 dividend share is an appealing long-term income investment.
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