Brickworks Ltd (ASX: BKW) is in the brick pit business and the brick pit business is booming.
The building materials producer buys large swathes of land on the urban fringes of Australia's major cities and uses the ground clay to form bricks, which it then sells to the construction industry. It also produces masonry, roofing, and entire facade systems, but a major payoff arrives when urban sprawl crawls far beyond the land it occupies.
At that point, it's often sitting on a real estate gold mine. This profitability has led Brickworks to increase or maintain its dividend yield for the last 44 years. This consistency has prevailed throughout the 1990's recession, 2008's global financial crisis, and the COVID-19 pandemic. Its current grossed-up dividend is 4.5%.
Brickworks, Soul Patts and Goodman Group
Brickworks started in 1930 and has been a major benefactor of Australia's surging real estate and construction industries, which has allowed it to diversify its assets to continue funding those dividends.
It owns 39.4% of investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which holds significant stakes in telecommunications, energy, mining, and pharmaceutical companies. Soul Patts has increased its dividend every year since 2000, which is the longest increasing dividend streak on the ASX.
Brickworks also owns 50% of a joint venture trust with Goodman Group (ASX: GMG) that it uses to fully service those leftover brick pits before renting or selling the land. Brickworks sells its used operational land to the trust at market value, Goodman then builds the infrastructure required, and both companies benefit from increased profitability at every step of the process.
There's no shortage of demand for this development expertise. The Brickworks/Goodman joint venture is currently building Amazon's $500 million robotics warehouse near the future Western Sydney Airport in Badgerys Creek. This is reflected in a more than 60% revenue increase over the past year for the venture.
Brickworks forecast and ASX performance
The interesting counterpoint to Brickworks' ASX dividend track record is its current and forecasted earnings, with earnings before interest, tax and depreciation down 19% in FY20.
From January to May 2020 the brickmaker's Australian earnings dropped 10% and US earnings slumped 30% as it cut 200 jobs at the height of the pandemic. The recovery has been swift but unexciting, with forecast annual revenue growth of 3.5% slower than the Australian market's 6% weighted average.
The Brickworks share price has a year-to-date return of -2.20% and while its 5-year share price return is up by 23%, that's still less than the market return. Its lower than average price-to-earnings ratio of 9.11 also shows a degree of pessimism from the general market. The company's performance in the US — where it has a heavy focus on the northeastern states — has also failed to meet recent expectations due to the COVID pandemic.
At Brickworks' 2020 AGM, however, what Brickworks chair Robert Millner is selling to investors was clear:
In the current environment of global uncertainty and record low interest rates, we recognise that a reliable source of income is more important than ever to our shareholders. Our ability to once again increase dividends is testament to our strong financial position, prudent capital management and our diversified business model.
