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Brookfield Buys: Value & Yield

12/08/2016 10:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

For yield and value, we like two limited partnerships that are under the umbrella of Brookfield Asset Management (BAM), a Canadian alternative asset manager with over $250 billion under management, explains Tim Plaehn, editor of The Dividend Hunter.

Since 1899, Brookfield has focused on alternative assets including real estate, alternative energy and infrastructure. It is known as a value manager with a contrarian point of view.

Its CEO, Bruce Flatt, is often called the “Warren Buffett of Canada”. It has a history on increasing dividends, but the yield is small at only 1.55%. The much better yields are with its subsidiaries.

The first of these is Brookfield Infrastructure Partners L.P. (BIP). It is involved in four sectors: utilities, transportation, energy and communications infrastructure. Its assets are spread throughout the world including the United States, Canada, Australia, India, Europe and South America.

BIP has 10,000 kilometers of rail and 3,600 kilometers of highways around the world, has natural gas pipelines and storage facilities across North America, and over 10,500 kilometers of electrical lines in the Americas.

All of BIP’s businesses are doing well. That has led to strong, double-digit growth in AFFO/share. That is a limited partnership’s equivalent of free cash flow and what ultimately funds the payouts.

The management has a target of 5% to 9% CAGR distribution growth. But luckily for shareholders, it has a habit of beating that target.

Distributions have increased on average 12% annually since inception in January 2008. That is one reason why BIP has, since its IPO, shown an annualized total return of 18%.
Its current yield of 4.75% looks very safe. Based on the past quarter’s FFO of $0.68, BIP is paying out only 57% of FFO to shareholders.

That leaves lots of room for another increase in the payout. And it’s relatively cheap, trading at only 12 times the year-to-date rate of funds from operations.

The next one in the Brookfield stable is Brookfield Renewable Partners L.P. (BEP). It owns and operates one of the world’s largest independent renewable power businesses.
It has 260 generating facilities across 15 markets in North America, South America and Europe with 10,700 megawatts of installed global capacity.

The company is theglobal leader in hydroelectric power, making up more than 88% (the rest is wind) of its power portfolio; and it is located in 82 river systems around the world.
The company targets a payout ratio of about 70% of FFO. Once again, management targets annual distribution increases of 5% to 9%. And like its brethren, BEP has grown its distribution for six consecutive years.

That’s likely due to the fact that its cash flows are 90% inflation-linked to escalations on contracted revenue streams that are, on average, about 16 years in length.

It would not surprise me if BEP delays increasing its payout for a few months as BEP is still assimilating the purchase Isagen, which runs Colombia’s largest hydroelectric plant. But I fully expect the payout increase policy to resume quickly.

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