When I was looking through the Construction Spending data the other day I found something I found interesting, and it has led to an investment opportunity for us today. The data was very tepid at the headline level, what I found interesting was the story told by the sub-data within the report.
To quickly recap; headline construction spending rose a mere 0.1% in August, far below the expected 0.4%, with the YOY comparison running a cooler than expected 6.5%. At face value, you would assume that housing is a big part of the spending, regardless of the amount, because demand for homes is so high.
The reality is residential spending fell in August by -0.7% which casts a shadow of doubt on earnings from the home builders. The year over year comparison in residential spending remains positive but fell to a mediocre 4.1% and lower than expected.
Private spending fell in August too, contracting -0.5% from the previous month and rising a moderate 4.2% year over year. With both residential and private spending contracting in August the question of who was spending money and on what came to my mind and the answer was enlightening.
More than 57% of all construction spending is on non-residential projects, 23% is public money, with nine of sixteen sectors growing at double digits. When I say double digits I don't mean a mere 10%; three sectors are growing 15% annually, one is growing faster than 20% annually, and two are growing in the range of 35% annually. The one thing they all have in common, the sectors with big growth, is that they are all infrastructure sectors.
I think it is clear by now that there is money flowing into infrastructure plays so that is where I want to put some investment dollars. The added bonus is that there are a number of positive factors driving this opportunity beyond the construction spending data.
- Real Assets - Infrastructure is part of the real assets asset class and as such provides diversification, reduced volatility within the portfolio and protection from inflation (the value of most real assets is regulated and/or tied to the dollar).
- Income - Infrastructure companies tend to pay steady, reliable income. The utilities and energy infrastructure plays tend to pay above the market average using the S&P 500 as a benchmark. Two that spring to mind are Duke Energy (DUK) which yields about 4.5% at today's prices, and Plains All American Pipeline (PAA) which yields closer to 4.75% while the average yield on the S&P 500 is closer to 2.0%.
- Capital Appreciation - With spending on infrastructure rising, growth in infrastructure focused businesses can be expected and this means capital gains for their stocks. Spending on infrastructure is not expected to slow anytime soon, the US Senate just passed a bill that will allow them to double-fund infrastructure projects around the world. The move is politically based, it is meant to counter China's growing influence, but in this battle, the winners will be investors.
- Value - Infrastructure stocks like Cemex (CX), Waste Management, INC (WM), and Macquarie (MIC) have been lagging the market and provide value and high yield. MIC is currently yielding close to 8% on a forward basis.
- Demand - There is a high demand for infrastructure domestically and abroad. Aging infrastructure among the developed nations needs to be maintained, updated and replaced while rapidly growing populations in the developing world are faced with the build-up of first-generation services.
You could build an entire portfolio from only infrastructure stocks which make choosing the best one to add to an existing portfolio daunting, to say the least. ETFs are another option but many of them yield far below what you can find within the underlying sector, and with closed-end funds targeting the same stocks.
I already own the Brookfield Real Assets Income Fund (RA) but want diversification away from real estate and natural resources as well as the debt securities the fund is invested in.
The Brookfield Global Listed Infrastructure Income Fund (INF) is a closed-end fund yielding over 8% at today's prices. The fund invests 100% of its capital in infrastructure equities and is well diversified among countries although 50% of holdings are US based equities. The current focus is on energy, utilities, and industrial plays, the top five holdings by sector are MLPs, Toll Roads, Pipelines, Electric/Utility, and renewable electric generation.
From the Global Listed Infrastructure Income Fund 2018 semi-annual report
"we expect global economic growth to continue its path of modest growth, albeit potentially interrupted by periods of heightened uncertainty relating to interest rates, inflation and trade policy tensions. The current backdrop of moderate global growth—with interest rates and inflation still below historical norms—is in our view, positive for investing in infrastructure securities.
The fund is also trading near a historically high discount to its NAV which is an added value for new investors. The discount is near -15% at this time and could be a value trap save that it is well above the average and outlook for the sector is bright. The fund's net asset value recently bounced on a key support level and is already moving higher as we approach the peak of third quarter 2018 earnings. In my opinion, the discount to NAV can be expected to narrow over the next year as companies within the sector outperform expectations, driven by spending.
Infrastructure, A Good Investment For Long-Term Investors
Infrastructure is a good investment for long-term investors regardless of the vehicle you choose. The need for spending is there and unsatisfied, the proof of spending (in the US at least) is in the construction data. While infrastructure stocks may not see the huge gains higher profile companies will experience they will continue to produce steady, sustainable returns in good times and bad.
Disclosure: I am/we are long RA, INF.
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.