A Finger in Many Tasty Pies

10/12/2010 12:03 pm EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

The widely diversified Brookfield Infrastructure Partners profits handsomely from moving energy and freight around the world, writes Gordon Pape in The Income Investor.

The Brookfield Infrastructure Partners LP (Toronto: BIP.UN, NYSE: BIP) is a publicly traded limited partnership based in Bermuda. The business consists of the ownership and operation of utilities and timber assets in North and South America, Australasia, and Europe, as well as access fees for the transportation, storage, and handling of energy, freight, and bulk commodities.

Specifically, the LP controls 8,750 km of transmission lines in North and South America and transmits electricity to 98% of the population of Chile. It is the second largest distributor of energy in New Zealand and second largest independent owner of utility connections in the United Kingdom. The partnership is a major player in coal handling, with a large facility in Queensland, Australia. The LP accounts for 8% of global seaborne coal exports and over 20% of global seaborne metallurgical coal exports.

Brookfield's fee-for-service revenue is generated from 15,500 km of natural gas transmission lines. Also in the portfolio are 5,100 km of railroad tracks (Brookfield is the sole provider of rail service in Southwestern Australia) and 20 port facilities.

The LP controls 1.3 million acres of timberlands in the US Pacific Northwest and Canada. Clearly, this is a large and well-diversified international business, operating in several key sectors.

The units currently pay at a rate of $1.10 annualized (figures in US currency). [As shares have risen,] the yield has dropped a little to 5.4%, but is still attractive. 

The distributions are supported by stable cash flow; approximately 80% of FFO is generated from regulated businesses or long- term contracts. About 42% of the cash flow comes from Australian assets, 32% from North America, 12% from South America, and 4% from Europe.

Investors can expect regular distribution increases in the coming years, which will increase the yield based on the original purchase price. Steady distribution increases tend to push up the market value of a security. In this context, management is targeting annual equity returns of 15% or more.

Growth potential is another important reason to like this partnership. Some of this will be organic growth, while some will be via merger and acquisition.

Brookfield's acquisition strategy involves searching for companies with long-life assets, minimal capital requirements, and stable cash flow due to high barriers to entry. Targets include transmission systems, ports, oil and gas pipelines, storage facilities, toll roads, regulated electricity and gas distribution systems, water distribution systems, and rail lines.

The risk [in] this security is somewhat lower than with most stocks because of the fact that much of the cash flow is generated by regulated businesses or long-term contracts. Global diversification is another key factor, and most of the assets are in stable countries like Canada, the US, Australia, and Great Britain. This LP is an excellent choice for investors content with a solid 6% yield and good long-term growth potential.

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