Brookfield Infrastructure Partners: A High Yield Play On Global Infrastructure Cash Flows
Summary
- BIP yields more than 4.5% after recent weakness.
- This fund is under the Brookfield umbrella, meaning that it has a lot of cash and high quality management behind it.
- Coupled with BEP, I have well diversified exposure to global infrastructure which I expect to be a stable growth market moving forward.
There are certain stocks that I buy in pairs. This is partly because of diversification measures, but also because in certain sectors/industries/sub-industries, I have a hard time differentiating between 2 or 3 leading competitors and instead of attempting to choose the winner amongst the bunch, I’d rather have broad exposure to all. A couple of examples of this are United Parcel Service (UPS) and FedEx (FDX) and Visa (V) and MasterCard (MA). I think FedEx is a better run company than UPS, but UPS pays a much higher dividend yield and is set to benefit from the same secular tailwinds. And when it comes to Visa and MasterCard, I honestly don’t know which is the better company (they’re both great!). So, why not own both and be done with it? Another example of this practice within my portfolio are a couple of Brookfield funds, Brookfield Renewable Partners L.P. (BEP) and Brookfield Infrastructure Partners. L.P. (NYSE:BIP). Although these two Brookfield funds have different stated goals/portfolios, I’m building these two positions side by side and side as I increase my exposure to infrastructure assets in lieu of utilities. Since my last piece here at Seeking Alpha was focused on BEP, it only made sense to follow that up with a BIP piece.
Unlike BEP, whose portfolio consists of renewable energy assets, highlighted by dams, wind farms, and solar arrays, BIP’s portfolio is focused on a much wider variety of infrastructure assets, which includes power generation, but also things like railways and toll roads, ports, natural gas storage and pipelines, and cell towers & fiber lines for the communications industry. BIP’s portfolio’s cash flow profile is spread out fairly evenly, which I like; BEP is so highly exposure to hydro assets that it’s nice to see BIP spreading its wealth across the board as far as global infrastructure goes.
Source: BIP Investor Fact Sheet
Not only is BIP’s portfolio diversified across infrastructure asset classes, but it’s also a global company. BIP’s portfolio is comprised of assets in North and South America, Europe, and various countries in the Asia Pacific region, including India and Australia.
The diversification in terms of asset type and geographic location is why I favor investments like BEP and BIP to utilities in my personal portfolio. The Brookfield funds offer similar yields with better growth prospects due to their flexibility across a somewhat similar asset class without having to deal with the government regulation that utilities face (though it is worth noting that both companies face regulatory headwinds throughout their portfolios). The income growth prospects that BIP/BEP offer lead me to believe that over the long-term, these two investments will be less interest rate sensitive; though only time will tell if I’m correct in that regard.
FFO was up in all of BIP’s operating segments in 2017, though the company did take some negative charges related to forex which put a slight damper on results. In my opinion, it’s tough to avoid that, however. It’s jus the cost of doing business in a globalized economy and I’m very happy with management’s proven ability to spot value and capitalize on it regardless of geographic location.
Regardless, 2017 was a strong year for BIP. The fund saw its FFO for the year come in at $3.11, which represented 14% y/y growth. This is below the company’s 10-year CAGR of 21%, but you won’t hear me complaining about double digit growth. As the portfolio grows it will become more and more difficult to produce 20%+ annual growth; however, if management continues to generate 10-15% FFO growth, they will be in a solid position to continue to make accretive acquisitions should they find them in the market and grow the distribution, which currently yields ~4.6% and has a 11% CAGR since 2009.
BIP management states that their aim is to grow the annual distribution by 5-9%, which would be wonderful at its current yield level (how many other companies can you name that yield more than 4.5% and offer sustainable mid-high single digit income growth prospects? I own several companies in that yield range; REITs and Teleco’s mainly, but those companies are much more likely to increase in the low-mind single digit range. What’s more, BIP management states that their goal with the fund is to generate 12-15% annual total return for investors and this is well above any expectation that I have for the REITs/Telecos that I own.
The company is committed towards generating double digit returns for shareholders. In a recent article posted here on Seeking Alpha, my fellow contributor, The Virtuous Cycle, call the company the “Tollbooth on World Commerce” and highlights a quote by BIP CEO, Sam Pollack, regarding the company’s investment mind frame, “if we cannot achieve our minimum 12% to 15% investment returns, then it's not an opportunity for BIP.”
In the same investor presentation, Pollack continues, saying, “We believe that if we keep our powder dry and leverage our global deal-sourcing capabilities, eventually the right investments will come and we'll be able to deploy capital.”
Source: BIP 2017 Investor Day Presentation, page 14.
BIP’s total asset base increased by over $8b in 2017, meaning that management has been able to find attractive deals.
One of the major reasons that I’m attracted to BIP (and Brookfield funds, in general) is the management’s long-term, value oriented mindset. These guys and gals seem to be cut from the same cloth as Warren Buffett and I feel comfortable having my money tied up with management teams committed towards long-term value, strong growth, and shareholder returns.
Speaking of the long-term, Pollack attempted to look into the future a bit towards the end of the 2017 Investor Day Presentation, saying:
“And so I don't have a crystal ball, and I'm sure it will be different than what we're showing here, but given the investment opportunities we’re seeing and our current investment strategy, we expect that by 2028, 10 years from now, if we look at our business, 40-45% of it is going to be in data, water, municipal infrastructure, and probably 25% of our business will be in Asia, which today it’s modest, so our business will look different, but we think that's all a good thing.”
Source: BIP 2017 Investor Day Presentation, page 15.
I’m not surprised to see a pivot towards Asia. From a population/population growth standpoint, this makes sense. What’s more, a focus on water related assets makes sense as well (I’ve often heard that potable water will become an ever more important commodity/resource as we move forward due to global warming/climate change and population growth).
I was surprised to see high data related infrastructure growth on the horizon since that isn’t something that BIP has invested in much thus far. Obviously in this digital age demand for data collection and storage isn’t going anywhere but up though, so I wouldn’t mind to see BIP go in that direction. I imagine the team in charge of the communications assets are well aware of trends in that area of the market and I have little doubt that Brookfield management would do well as they branch our into new market frontiers.
BIP’s yield isn’t quite as high as BEP’s, the last Brookfield fund that I wrote about and buy in tandem with BIP, but I would say that BIP’s yield is likely more secure and as higher growth prospects in a wide variety of economic environments due to its lower payout ratio. BIP’s FFO was $3.11 in 2017 and the distribution was only $1.74 (which represents a payout ratio of $68%, as opposed to BEP’s 92% FFO payout ratio).
BIP’s distribution increased 12.25% in 2017, up from $1.55 in 2016. Like BEP, this isn’t your traditional DGI company and I don’t expect to see a perfect stair step pattern of distribution increases coming out of BIP. Management does seem to be committed towards shareholder returns and increasing the income that it provides shareholders (which it has done well as you can see on the graphic posted below from the recent quarterly slide show).
Source: page 7 of Q4 CC slideshow
Here’s a statement that management made regarding its distribution policy for any income oriented investors starting their due diligence on BIP.
Source: Q4 CC Slideshow, page 6
A quick check on F.A.S.T. Graphs showed me that BIP investors who bought BIP 9 years ago would have a yield on cost of more than 23% today. Even better, BIP’s annualized rate of return since 12/31/08 is 23.4%, which is significantly higher than the 14% that investors received via the S&P 500 if they re-invested their dividends along the way. That shows the power of compounding at work over a relatively short period of time. I don’t know if BIP will perform that well over the next 9 years or not, but even if it generates half of that annualized ROR, I’ll be satisfied with my investment.
Source: F.A.S.T. Graphs
Like Mr. Pollack, I also don’t have a crystal ball. I can’t say for certain that any investment will play out like I think it will, but my confidence level that BIP’s cash flow focused business will continue to contribute to my passive income stream, in an ever bigger way, is sky high.
I’ll leave you with this nugget, that only bolsters this confidence; scrolling through the comment stream of The Virtuous Cycle’s BIP focused piece I came across a discussion of Lou Simpson’s holdings, which includes a nearly 11% weighting to Brookfield Asset Managers (BAM), the parent company of Brookfield Infrastructure Partners. Simpson is the former CEO of Geico’s capital operations and Buffett has said very nice things about him as an investor. He’s known for his disciplined value mindset and although Simpson’s investment was in BAM and not BIP/BEP, it makes me feel good all the same about my choice to own several of Brookfield’s funds (BAM is on my watch list as well, though it’s yield is much smaller than both BIP’s and BEP’s, at just 1.54%). It's always nice when your opinions are aligned with the market masters'.
This article was written by
University of Virginia, class of 2011 B.A English
Senior Investment Analyst at Wide Moat Research.
Contributor for Safe High Yield, The Dividend Kings, iREIT, and The Forbes Real Estate Investor.
I am also the former editor-in-chief and portfolio manager at The Intelligent Dividend Investor.
Check out my youtube channel for other investing ideas: https://www.youtube.com/channel/UCP7AhF_TqJSE7fN7CFwxKlg?view_as=subscriber
Ranked #18 overall blogger by TipRanks for 2014.
Former contributor at TheStreet.com (where I cover stocks held in Jim Cramer's Action Alert PLUS Charitable Trust Portfolio), Investing Daily, and Sure Dividend.
Former Editor-in-Chief of The Dividend Growth Club and The Income Minded Millennial.
I am a young investor focused primarily on dividend growth stocks. Seeking Alpha, and more specifically, the dividend and income community that exists here, has played a significant role in my development as a portfolio manager. I am not a professional, though I do manage my family's finances. I enjoy the process; the research, the decision making, the strategic planning...and not paying a financial adviser to do the work for me.
I've built what I believe to be a conservative, diverse, and balanced dividend growth portfolio currently consisting of ~60 positions. At the end of every month I break down the portfolio in my Nicholas Ward's Dividend Growth Portfolio Updates.
Thus far, I've been able to meet by goals from income, income growth, and capital appreciation standpoints. I use a wide variety of metrics, both fundamental and technical, when establishing fair value when doing my due diligence on an individual company. All of my methods are discussed in my work here.
I hope this work inspires debate, conversation, and education - this is why I write for Seeking Alpha, to give back to the community that has helped me so much and to hopefully contribute, in some way...even if its by posing a question, to the growth of others.
*I should note that all articles that I write here are done so for my personal informational/educational purposes only. Any purchases that I make or opinions that I express are not meant as recommendations for anyone else. Please perform your own due diligence before following my lead into or out of a position. I am not a professional. I am not a financial adviser of any sort. I enjoy investing and the open discussion that articles on this site inspire - this is why I write, not to influence anyone else's decisions, but to enhance my own ability to make sound financial choices. That being said, I wish the best of luck to everyone. May we all meet our own financial goals.
Analyst’s Disclosure: I am/we are long UPS, FDX, V, MA, BEP, BIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (67)
Interested in your piece but a bit confused. If one looks at total returns on nav over the last five years, Bam has has under performed both BX and Ares by a significant amount. How do you account for this? Could be that they spun out holdings but the average total returns on the nav values just are not as good. What am I missing? tIA SC
thank you for your timely reply but it real is not a satisfying reply. Your essay is full of praise for BAM and any reader would think that given your respect for the ceo , that you think it is a very well managed company. Yet on such a basic level as total return on Nav, BAM has not been a very strong pro former Perhaps total return on nav is not a suitable metric but to write a full piece with praise of management and not be able to come up with something like I've not looked into it is disappointing to say the least.As I suggested both BX and Ares have delivered much more to shareholders than has BAM. Now if BAM has delivered value by distributing shares. in their other firms, then this should be made clear. If not why would anyone want to take BAM over others which have done better. Looking at your holdings, you too are not a holder at this point.
I'm not trying to bash BAM but rather to understand why I should be interested in this firm. I do hold shares in BIP which has done much better. I was also impressed on listing to fund managers from BAM but their delivery as reflected in the morningstar numbers leaves much to be desired. If I'm missing something , then I would like to know about it. TIA SC
Brookfield Infrastructure L.P. currently has access to a revolving credit facility that it does not anticipate using. If the credit facility were utilized by Brookfield Infrastructure L.P. it may generate UBTI. Debt financed UBTI has not been and is not expected to be a material portion of Brookfield Infrastructure Partners L.P.'s income. UBTI is relevant to U.S. tax exempt entities."How much UBTI has BIP generated in the past? Do you feel it would be safe to hold it in a tax-advantaged account?
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