The G-20’s Global Infrastructure Hub estimates that a global investment of $94 trillion will need to be invested over the next several decades. That’s trillion with a "T", notes Tom Hutchinson, income expert and editor of Cabot Dividend Investor.
Governments don’t have all those trillions of dollars lying around. The only way to possibly answer the need is with private money. And governments are partnering with private companies on certain projects as well as selling existing infrastructure assets to private firms to raise money for other projects.
Bermuda-based Brookfield Infrastructure Partners L.P. (BIP) owns and operates infrastructure assets all over the world. The company particularly focuses on high quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
BIP was established by world renowned, Toronto-based asset manager Brookfield Asset Management (BAM) in 2008 to take advantage of the infrastructure build-out. BAM still acts as manager and General Partner and owns a 30% stake in BIP.
While infrastructure investing has recently started to boom, Brookfield was early to the party. BIP has had the foresight to scour the globe and pluck the very best assets before much of the potential competition got wise to the phenomenon.
It now has valuable partners and contacts all over the world that enable the company to find profitable projects as they become available. It’s a great business but you really have to know what you’re doing. These guys apparently do.
Since 2009 the partnership has grown funds from operations (FFO), the key determinant of cash flow for MLPs, by an average of 16% per year. Over the last ten years the stock has returned 632% (with dividends reinvested) for an average 22% annual return, double the return of the S&P 500 over the same period.
Brookfield has a current portfolio with 2000 assets in 30 countries on five continents. It is well diversified geographically with roughly 25% in North America, 30% South America, 25% Europe and 20% Asia Pacific.
Assets include toll roads in South America; telecom towers in France; railroads in Australia; natural gas pipelines and storage in North America; utilities in Brazil; ports in Europe, Australia and North America; and data centers on three continents.
The assets are diverse and well chosen for reliable cash flow and profitability. They are vital properties that continue to generate cash in any economy and are tailor made to generate dividend income.
As a Master Limited Partnership (MLP) BIP pays no income tax at the corporate level provided the bulk of earnings are paid out to shareholders in the form of distributions. As a result, it has a higher payout than most regular dividend stocks.
The current yield is 4.95% ($0.5025 per quarter and $2.01 per year) and the annual distribution has increased at an average 10.4% annual rate over the last five years. The company plans annual dividend growth of 5% to 9% going forward.
The payout is well supported as the current payout ratio is just 63.5% of FFO, which is very low for an MLP. The low payout ratio is actually a big key to future growth as well. It enables Brookfield to retain its own funds to invest in growth.
In order to take advantage of the abundance of opportunities likely to become available in the quarters and years ahead, Brookfield has developed a superior strategy for raising the necessary capital to pursue the best investments and grow earnings.
MLP’s are not a perfect structure because most pay out all the earnings in distributions and have to either issue new stock shares or borrow money to get funds for expansion.
The strategy can dilute shareholder value and raise too much debt over time. In order to maintain the strong balance sheet with investment grade rated debt and maintain shareholder value, Brookfield shifted gears on its strategy last year.
To raise capital it is now relying on asset rotation in addition to retained earnings. The idea is to sell mature assets when returns have maximized and use the proceeds for high return projects.
It started last year when the company sold lower performing assets to invest in ones with higher returns. The temporary adjustment caused a rare bad year for stock returns as earnings faltered because of the sale before it could get the new assets on line.
Those new assets will bolster earnings this year, which should hopefully reignite the stock. About 80% to 85% or revenues are in US dollars or dollar hedged. This is a company and stock that is in the right place at the right time with a business model of proven success in the sector. It will be added to the High Income Tier as a “buy”.
