By Michael Vodicka
The United States has made improving its infrastructure a clear objective. In recent speeches promoting his renewed emphasis on the economy, President Barack Obama has been reinforcing his commitment to investing in the country's infrastructure, saying, "We know strong infrastructure is a key ingredient to a thriving economy."
That comes on the heels of his "fix it first" infrastructure proposal earlier this year that would allocate $40 billion for ailing highways, bridges, and airports while setting another $10 billion aside to create a national infrastructure bank. The push for more spending on infrastructure comes in response to data from the National Association of Civil Engineers that says domestic infrastructure is in dire need of an upgrade, projecting long-term spending needs in excess of $2 trillion.
Long-term investments in rebuilding the country's infrastructure will benefit the entire economy, but there is one company in better position than others to profit.
Brookfield Infrastructure Partners (BIP) is a master limited partnership (or MLP) that owns and operates an impressive portfolio of domestic and international infrastructure assets that generate stable cash flows and require relatively minimal maintenance capital expenditures. Its current portfolio consists of the ownership and operation of several premier utilities, transport and energy assets in North and South America, Australasia, and Europe.
Brookfield's largest division is utilities, with more than 6,000 miles of electricity transmission lines in the Americas and the United Kingdom. The utilities division recently completed the merger and recapitalization of its U.K. regulated distribution business, doubling in size, while also increasing its ownership interest in its Chilean electricity transmission system. Brookfield has also invested $750 million in a transmission system in Texas that is near completion and set to go online next year.
Its energy division operates about 2.5 million electricity and natural gas connections in the U.K., New Zealand, and Colombia. Its transport division provides energy distribution and storage services through more than 9,600 miles of natural gas transmission lines, primarily in the United States. Brookfield also owns one of the world's largest coal-export terminals in Queensland, Australia, with 85 million tons of annual capacity that is 100 % contracted through 2018. The company's broad portfolio of assets and exposure to global markets creates a highly diversified revenue stream to protect Brookfield against regional or market-specific weakness.
Although Brookfield will benefit from investments in domestic and international infrastructure projects, the company is also making strategic moves to focus on its core assets. On June 16, Brookfield announced it sold the remaining 343,000 acres of timberland for $790 million, finalizing its divestment of its timber business and netting $370 million in cash. Brookfield also sold its remaining acreage in British Columbia for $170 million.
Brookfield continued its divestures in early July, announcing on July 5 that the partnership had entered into an agreement to sell its 42% interest in an Australasian regulated distribution business for $410 million. These sales have net the company a total of $950 million, which it will reinvest in its core businesses; Brookfield expects that money to generate annualized after-tax returns on equity of 12% to 15%.
Those strategic adjustments will continue to fuel the company's already impressive growth. The company's second-quarter results from early May saw funds from operations -- a key performance metric for MLPs -- jump to $160 million, or 80 cents a share, from $108 million, or 58 cents a share, in the same period last year. That 48% increase was driven by organic expansion initiatives and recent acquisitions.
The company's strong financial profile continues to support its outsize dividend yield of 4.8%. In the past five years, distributions have grown more than 12% a year to a current annualized rate of $1.72, yielding 4.3%. Management targets annual distribution growth between 3% and 7% and paying out 60% to 70% of funds from operations. Looking forward, Brookfield is expected to increase its earnings by 6% annually over the next five years, outpacing the industry average of 5%. But in spite of its high dividend yield and growth projections, Brookfield's forward price-to-earnings ratio of 12 is below its 10-year average of 13 and its peer average of 15.
Risks to Consider
Utilities operating in highly regulated markets are always vulnerable to changes in policy and rates. Brookfield also carries significant exposure to the global coal market, with consumption highly dependent on demand from China as its economy showing signs of weakness. Brookfield boasts an impressive portfolio of domestic and international infrastructure assets. That places the company in position to capitalize on the bullish trend in global infrastructure spending.