By Jonathan Weber
Brookfield Infrastructure Partners (BIP) is a limited partnership that owns and operates infrastructure assets such as utilities, energy, communication infrastructure, and transportation infrastructure. The company offers an above-average dividend yield, and investors should see sizeable share price gains on top of that over the coming years.
We believe that Brookfield Infrastructure Partners is attractively priced right here, and that income-oriented investors could hitch their wagon to Brookfield Infrastructure Partners' world-class management via this cheap dividend stock.
Brookfield Infrastructure Partners is one of several publicly traded LPs that belong to the Brookfield Asset Management (BAM) family. Brookfield Infrastructure Partners was founded in 1905 and trades at a market capitalization of roughly $15 billion.
Source: Brookfield Infrastructure Partners investor fact sheet
Brookfield Infrastructure Partners operates on several continents, which provides a lot of geographic diversification. The biggest segments are BIP's regulated transmission, regulated distribution, and toll roads businesses, but the company is active in several other industries on top of that.
Management puts a focus on best-in-class assets. These assets are not the cheapest, but investors benefit from high margins, strong cash generation, and above-average internal growth rates, which explains how Brookfield Infrastructure Partners has been able to grow so consistently, and at a quite attractive pace in the past.
Recent Results and Growth Outlook
Brookfield Infrastructure Partners has reported its most recent quarterly results in early November. During Q3 the company grossed revenues of $1.17 billion, which was 22% more than the company's revenues during the previous year's quarter. Funds from operations, which are the best metric to evaluate BIP's profitability, totaled $0.71 on a per-share basis during Q3, which represents a growth rate of 8% year over year.
Source: Brookfield Infrastructure Partners investor fact sheet
Brookfield Infrastructure Partners has delivered a highly attractive, high-teens FFO-per-share growth rate during the last decade. This was possible due to several contributing factors.
The first one is what management calls "same-store FFO growth", which basically refers to rising earnings and cash flows from existing assets. This is possible due to rising revenues (e.g. due to increased pricing, higher customer counts, a higher workload) but also due to the impact of more efficient operations, as Brookfield's management oftentimes finds ways to increase margins and to lower expenses at assets that the company acquires.
Brookfield Infrastructure Partners also acquires new assets regularly. Those acquisitions are typically financed by retained cash flows, as Brookfield Infrastructure Partners does not pay out all of its FFO in the form of dividends. Excess cash flows can be used to acquire new assets regularly. Sometimes management finds assets that are so attractive that Brookfield Infrastructure Partners acquires them via the issuance of debt and/or equity. These acquisitions drive the company's FFO-per-share growth further.
Brookfield Infrastructure Partners plans to deploy a large amount of money towards energy infrastructure going forward, as the company sees a lot of chances in this segment. Based on the fact that management has many ways to grow profits and accounting for the fact that Brookfield Infrastructure Partners has grown its profits at a very sizable pace in the past, we believe that it is relatively likely that Brookfield Infrastructure Partners will grow its FFO-per-share by at least 10% a year going forward.
Valuation and Dividend Analysis
Due to its large asset base, Brookfield Infrastructure Partners has large non-cash expenses for amortization and depreciation. Funds from operations, which exclude these items, are thus a better way to assess the company's underlying profitability and cash flow generation potential.
Based on our estimate for FFO-per-share of $3.20 during fiscal 2018, Brookfield Infrastructure Partners is trading at just 11.6 times this year's profits.
Brookfield Infrastructure Partners used to trade with a price to FFO ratio of 11.7, on average, over the last couple of years. This means that shares are trading in line with how they were valued in the past right here. On an absolute basis, shares still look quite inexpensive, especially when we factor in the great track record of Brookfield Infrastructure Partners, as well as the high quality in both its asset base and its management team.
Brookfield Infrastructure Partners has raised its dividend very consistently, and at an attractive pace, over the last decade. The long-term growth rate is 11%; the most recent dividend increase was slightly smaller, at 8%.
Brookfield Infrastructure Partners offers a dividend yield of 5.1% right here. When we make a conservative assumption that the company's dividend will grow by only 8% a year going forward, its dividend yield (for someone buying today), would still rise to 7.5% over the next five years. When we assume that dividends are reinvested at an average yield of 5%, the yield on cost would be an even better 9.6% in five years.
Brookfield Infrastructure Partners' dividend looks relatively safe, as the payout ratio of 59% is not high at all, compared to other limited partnerships. Brookfield Infrastructure Partners' business is not cyclical, as the infrastructure that the company provides is needed during times when the economy is doing well, but also during times when the economy is not in great shape.
When we assume that Brookfield Infrastructure Partners' valuation does not change going forward, investors could expect total returns of roughly 15% a year over the coming years, through a combination of dividends (5.1%) and share price gains, due to our forecast of FFO-per-share growth of 10%.
Brookfield Infrastructure Partners provides critical infrastructure that is needed during all times. The company has a great management team and an outstanding track record when it comes to earnings growth as well as when it comes to dividend growth.
Shares are trading at an inexpensive valuation, offer a dividend yield of slightly more than 5%, and we believe that it is possible for Brookfield Infrastructure Partners to deliver ~15% annual total returns going forward.
Disclosure: I am/we are long BAM. 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.