Soul Patts has 20% in cash. Todd Barlow says everything else has to earn its place

James Marlay (0:13)

So, if I could, could we get the poll results up, please? Could we just see where people land?

Oh, I think the framing of the question might have put people off. Put people off, but, yeah, 28 consecutive years, 27 increases. Your full year results are coming out on Thursday, I believe.

Todd Barlow (0:34)

Yep.

James Marlay (0:35)

You're obviously very relaxed if you're happy to be here sitting here with me.

Todd Barlow (0:38)

There's some furious activity back at the office, but yeah, and I'm very happy to be here. It's a great event, and it's a real pleasure to talk to you all.

James Marlay (0:48)

Yeah, great. Well, for those of you that don't know, in the States, they have a term, which is the dividend aristocrat, which is a term that's given to companies that have increased their dividend 25 years consecutively. And in Australia, if we can bring that up, I've put together there a list of all the companies on the ASX that are on a dividend streak. So these are companies that have increased their dividend in consecutive years.

Maybe put an asterisk next to Arena Reek, that one's going to drop off. It's guided down its dividend. And that list would have looked quite a lot different pre the August reporting season. It is actually quite difficult for companies to maintain that streak. Obviously talks to the process that you've put on there.

The next milestone, Todd, is the Dividend Kings, which is when you get to 50 consecutive years of increase in dividend. In the States, there's 70 of those. So that's 22 years from now. How do you feel about that?

Todd Barlow (1:56)

Well, I think I'll be long retired by that time. But yeah, I hope that we set up the business in a way where we can keep doing it.

There's a real resilience to the portfolio today that makes it more able to continue that growth. Whereas in the past, we were very exposed to a few large stocks and of course, they can have hiccups along the way and that can expose you to lower dividends. But the way that we've set the portfolio up today is that we should be able to grow into the future and we should be able to grow quite well. I mean, you can see there that the CAGR is what's important. I mean, just being able to increase the dividend is an achievement in itself, but being able to grow it at that level is something that we're extremely proud of.

James Marlay (2:41)

Yeah, very good.

I was listening to Jensen Huang speak on a podcast the other day, he was talking about AI naturally. And he said, it's a bit like a time machine. It can actually give us a view into the future. And so I thought, well, if you did make it to the dividend king 22 years from now, what would you look like? And AI is brilliant these days, it actually gives us a little bit of a window. And I popped some results, popped a search term in. And there's an incredible likeness to your chairman Rob Milner.

Todd Barlow (3:12)

Well, I hope I'm still as good as you can see by that age.

James Marlay (3:16)

Very good.

So there's the background Soul Patts, as we've talked about, the dividend increases. You can see it's also helped drive returns. But let's talk about where we are today. That's obviously the past. We're talking about going forwards. And the environment has changed quite dramatically. I've got the US 10-year treasury yield up there on the slide behind us.

That's the risk-free rate. That's what you can get for effectively taking no risk. This has changed quite dramatically in the last five years. Maybe you could talk us through how material that movie is for you and how it starts to feed into how you're thinking about investing at Soul Patts.

Todd Barlow (3:58)

Sure. Well, I mean, in Australia, if I look at the last five years, the 10-year rate today is about 5.3 percent. Five years ago, it was under one and a half percent. So that's nearly a four percent move in the risk-free rate. Now, for any of us here who have done a DCF, a four percent change in the discount rate has a profound impact on the valuation output.

Now, I would have thought that anybody who was using a risk-free rate five years ago of one, one and a half percent was probably showing some poor discipline. Most people kind of felt that that was far too low. But nevertheless, we are in a different environment now to where we were five years ago. Quite simply, the way we look at it is we're now getting paid for riskless cash and whatever risk that we're taking on top of that, we need to get paid for and we need to make sure that we're appropriately compensated for taking the risk. So the portfolio has to change in that environment. When you have that kind of impact on the risk-free rate, it does necessitate a change to the way that you think about asset allocation.