There are plenty of reasons why I’d prefer to buy WHSP (ASX: SOL) shares compared to NAB (ASX: NAB) shares.
What is WHSP?
WHSP is an investment house business which has been on the ASX for over a century. Its origins are in owning and operating Australian pharmacies, which is where the Soul Pattinson chemist chain comes from, however, that business is now owned by Australian Pharmaceutical Industries (ASX: API), which WHSP owns 19.3% of. WHSP invests in a large number of companies across a variety of industries such as construction, resources and telecommunications.
Reason 1: Reliable and diversfied earnings
ASX investors may have the impression that banks like NAB are pretty defensive. If you asked European or US investors if banks are reliable, I’m quite sure they’d say “no”.
The huge balance sheets of banks can be severely hit during times of economic carnage like we’re seeing with COVID-19. Bad debts would be very bad for bank earnings.
What about WHSP? Its earnings are based on the underlying earnings of its investments like API, TPG (ASX: TPM) and New Hope (ASX: NHC) which should all hold up well. Pharmacies and internet services are in high demand whilst coal prices are staying resilient.
I don’t see anywhere near as much downside for WHSP as NAB if the situation worsens.
Reason 2: Defensive dividend
NAB has already had to reduce its dividend even before COVID-19 hit Australia (and New Zealand). The Reserve Bank of New Zealand (RBNZ) has already asked New Zealand banks (including the NAB subsidiary) to not pay dividends so that they remain strong.
Compared that to WHSP. It has already said it plans to grow the dividend this year, adding to its dividend growth streak which has been going since 2000. WHSP managed to grow its dividend through the GFC and I think the defensive earnings of its investments should mean WHSP can continue growing its dividend going forwards.
Reason 3: WHSP can take advantage of lower asset prices
As an investment house, WHSP will be able to deploy its available funds into buying assets which are now much cheaper than they were a couple of months ago. WHSP aims to be a contrarian investor. It’s great at wading into opportunities when others are selling. For example, it recently invested in agriculture amid one of the worst droughts in Australia.
NAB can’t really take advantage of the situation. It has to remain a strong financial presence for the economy and its profit margins, the net interest margin (NIM), is heading lower.
Is WHSP a buy?
Despite the recent recovery, the WHSP share price is still down by over 20% from the start of the decline. It’s a lot better value than it was before. It also offers a fully franked dividend yield of 3.25% which grows year after year. NAB is a huge business (with little growth prospects), whereas WHSP has plenty more growth opportunities. I have bought some WHSP shares since the declines started and I’d be happy to buy more today.
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Disclosure: at the time of publishing, Jaz owns shares of WHSP, but that could change at any time.
