Brookfield Infrastructure Partners Looks Intriguing As A Utility Dividend Stock

Given my macro view, which includes inflation at some point because of the Fed's expansionary monetary policies, European recession, and increased volatility, I am looking for two types of stocks: best-in-breed secular growth stocks for a 20% allocation in my portfolio, and reliable dividend growth stocks with established economic moats/strong brand names for the remaining 80%.

Today, I will discuss a dividend stock with significant growth potential, Brookfield Infrastructure Partners (NYSE:BIP). BIP was spun off of Brookfield Asset Management (NYSE:BAM) in 2008, and is focused on holding physical assets which throw off reliable cash flows. Its assets include:

  • Australian coal terminal
  • Dominant Chilean electricity supplier
  • Canadian, British and New Zealandic electrical and natural gas distribution networks
  • American natural gas pipelines
  • Australian and British railroads
  • Canadian timberlands

The partnership has globally diversified assets, and while many of its assets operate in highly regulated markets, BIP's timberlands, NG pipelines, and ports benefit from recoveries in their respective industries (construction, NG, and trade).

Take note, BAM still owns ~40% of the partnership, so BIP's fortunes are tied in some sense to those of BAM. Personally, BAM's historical returns have been strong, especially in the utilities sector, with 10 year returns of 470%, excluding dividends and 125% returns from its March 2009 lows (vs. 22% and 78% for the S&P). Source: Yahoo!Finance.

BIP's returns for that matter are ~50% since it was spun off in January 2008, vs. negative returns for the Dow and S&P over the same period.

Source: Yahoo!Finance.

Now, the fundamentals:

Sources: Yahoo! and Wikinvest BIP BAM
P/E 7.8 8.4
Operating Margin 32 19
ROE (%) 25 16
Beta .84 1.24
EPS Growth (Qtr) 88 126
Dividend Yield(%) 4.8 1.6
Debt/Equity 2.76 4.1
Click to enlarge

As a utility dividend stock, I find BIP especially intriguing because it offers a diversified portfolio of assets and thus avoids localized crises that utilities sometimes experience, a solid dividend, and the potential for capital appreciation.

Utilities generally trade at low multiples because of their low growth prospects (~10 P/E), but with BIP's growth story I could easily see a P/E of 12 or higher materializing as the economy recovers. That implies a 50% upside, not accounting for any acquisitions or dividend increases.

Disclosure: I am long BIP.