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Income and Infrastructure
12/04/2015 10:00 am EST
Richard Stavros, editor of Global Income Edge, considers global infrastructure an emerging asset class that is well suited for income investors. Here, he looks at three subsectors—electricity, natural gas, and water—and highlights a favorite investment opportunity within each category.
Steven Halpern: Our guest today is Richard Stavros, editor of the industry leading investment newsletter, Global Income Edge. How are you doing today, Richard?
Richard Stavros: Hi Steven. Thank you for having me. It’s good to be with you again.
Steven Halpern: Well, thank you for taking the time. In your latest issue you state that infrastructure is the grease that makes the economy run smoothly. Can you expand on the importance of infrastructure to overall global development?
Richard Stavros: Yes, of course. Since the financial crisis governments around the world, including our own, have deferred spending on critical infrastructure and now, as many probably already know, there is a pressing need to replace and enhance aging infrastructure, whether it be energy, water, bridges, or roads.
I mean, everyone has probably heard the news—or seen the newscasts—of bridges falling down and certainly there’s a lot of potholes in a lot of different neighborhoods.
But as far as the importance, as I mentioned in the report from our recent issue, the interstate highway system built during the Eisenhower administration is credited with making America the world’s dominant economic power—or helping America be the world’s dominant economic power after World War II—by allowing commerce or trade to develop smoothly and efficiently.
We have a lot of other examples of this. There’s a really good book by a current Morgan Stanley asset manager, Ruchir Sharma, from Breakout Nations, and he talks in his book, he went around the world and he showed how Brazil’s economy, that the lack of infrastructure development was impeding its growth.
And he gave an interesting example in his book of how the roads and infrastructure were so poor that goods for export sat in trucks for days on roads that were backed up for miles.
Today we have a situation where infrastructure growth is not keeping pace with population and economic growth around the world. Just to throw a statistic out at you, worldwide capital projects and infrastructure spending is expected to total more than $9 trillion by 2025, up from $4 trillion in 2012, according to Oxford Economics.
The real opportunity today is that private entities—in addition to public entities—would be responsible for this global infrastructure build-out because governments around the world are so severely indebted from the financial crisis where global debt has increased $57 trillion since 2007, so there’s an opportunity for income investors.|pagebreak|
We see this infrastructure as an emerging asset class, which private entities will play a major role in the upgrade. The timing on the assets and the liabilities match up well as these are long-term investments, which, in some cases, may have government guarantees, which is the type of stable long-term investments that all income investors look for.
Steven Halpern: Now, in your research you touch on three areas in particular where you’re seeing some opportunities and those are electricity, natural gas, and water. Could you briefly expand on some of these developments you see in these three areas?
Richard Stavros: Yes, I’d be happy to. I’m going to give you some just bullet points from my research. There’s been a lot of research done by energy companies and consultants and they’ve done detailed analysis, as well as my own analysis, but they come up with three different trends.
- In electricity, from 2010 to 2040, demand is projected to increase about 85% as living standards rise and economies expand
- In natural gas, it’s projected to rise 65% from 2010 to 2040 and that’s according to Exxon Mobil’s (XOM) numbers
- In water, by 2030, global water needs will grow 40%, according to water resources
There is huge opportunity for infrastructure investment, even in the United States alone, the Environmental Protection Agency has calculated that we probably need about $1 trillion of investment to bring our water resources up to standard.
Steven Halpern: So, let’s turn to some individual investment ideas—and I’m on electric utilities—you particularly like Sempra Energy (SRE). What’s the attraction here?
Richard Stavros: I’d be happy to cover that. First, here’s a little background that sort of explains Sempra. Over the years, growth in developed economies has been capped and somewhat stronger in emerging markets. In this new normal, world investors can’t afford to simply invest in developed economies.
It has been my thesis that many global multinationals with investments in both developing and developed nations of that position to bridge the growth gap and offer lower risk. That’s why Sempra has been attractive to us.
The San Diego-based energy utility gets more than its 70% revenues from its regulated utilities so it also has an international energy growth business.
Sempra has subsidiaries in Mexico, Chile, and Peru. These are power distribution subsidiaries. Its growth prospects are impressive. The international division has been steadily expanding by 11% a year.
Last quarter, Sempra forecasted at 50% increase in earnings per share between now and 2019. I believe this is a solid US utility that has 70% rate regulated, very dependable, but it has growth and so it has a dividend yield right now of 2.73%, but I think there’s going to be a lot of growth in that dividend yield—or payout—and that’s why we like Sempra.
Steven Halpern: Now, in the natural gas market, you point to AmeriGas Partners (APU), a limited partnership. What’s the story here?|pagebreak|
Richard Stavros: Well, given the drop in natural gas prices due to the shale revolution, distributors of natural gas and natural gas substitutes has become increasingly valuable.
And this is just not natural gas and electric distribution, this is also a key piece of infrastructure that’s becoming more valuable, but shortly natural gas companies—or distribution utilities—have become so popular, or so valued, that Duke Energy (DUK) recently bought Piedmont Natural Gas and Southern Company (SO) recently bought AGL Resources.
A lot of this natural gas is going to go to power plants that are being built. Natural gas-fired power plants are going to replace coal plants. We think AmeriGas has a nice mix because it distributes propane, which is a bit of a competitor in the heating space, but it has its kind of own niche in terms of portability.
As many of your listeners may or may not know, propane gas is known for outdoor grilling, but it’s also a significant source of heat and power, and also, it’s considered a greener fuel than natural gas. We think that the propane market is a good place to be because it has its own sort of niche; AmeriGas has its own network that’s already established.
Given the energy content of propane, propane has twice the usable energy content per cubic foot, we think it’s going to be a fuel that is going to be much more in need and in demand as the US and the rest of the world seeks more efficient fuels that are low carbon emissions.
Steven Halpern: Finally, let’s look at your pick in the water sector. Could you walk us through your rationale for recommending Aqua America (WTR)?
Richard Stavros: Certainly. Water utilities are going to be increasingly valuable as they replace and expand their infrastructure. What we like about Aqua America is that it’s a company that has been able to build out its infrastructure very efficiently.
That’s what we want, because if there’s going to be $1 trillion invested in expanding the water infrastructure, we want someone who’s going to do that very well—and get a return on investments—and the industry’s most cost efficient company, producing and distributing more water at the lowest cost.
At the same time, that income has been drawing at a compounded annual rate of more than 10% thanks to management’s focus on more profitable opportunities. We believe that between management and track record, this is the company that will benefit from this increase in investment and expansion into the water infrastructure.
Steven Halpern: Again, our guest is international investing expert, Richard Stavros, editor of Global Income Edge. Thank you so much for your insights today.
Richard Stavros: Thank you, Steven. Good to be with you.
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