Those who are following my real money retirement portfolio know that I’m most comfortable buying high-yield income investments when the market hates them most.
However, while my strong preference is to buy stocks when they are ridiculously undervalued (and generally close to 52-week lows), occasionally, I’ll purchase a world class company at a smaller discount or even happily pay fair price.
After all, Warren Buffett, history’s greatest investor is famous for saying, “it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Brookfield Infrastructure Partners (BIP) is one such stock. In fact, I consider it by far, the world’s single best utility, and perhaps even the best dividend growth stock in the world; nothing less than the Berkshire Hathaway (NYSE:BRK.A) (BRK.B) of high-yield dividend growth investments.
That means it currently represents the epitome of a “buy and hold forever” stock; one worth holding for decades as the world’s best infrastructure capital allocators compound your wealth and make you rich.
Let’s take a closer look at why Brookfield is such an effective money minting machine, its future is brighter than ever, and why today is likely still a good time to add the king of global utilities to your diversified high-yield portfolio.
The Safest Business Model In The Industry
Brookfield Infrastructure Partners is a Limited Partnership or LP, set up by Brookfield Asset Management (BAM), the world’s largest and oldest (115 years of experience) investor in real estate, infrastructure, and utility assets.
Source: Brookfield Asset Management
BAM owns 30% of BIP’s limited partner units (what retail investors buy), as well as 100% of the incentive distribution rights or IDRs. These entitle it to 25% of marginal AFFO above a certain hurdle rate (most MLPs have 50% top IDR tiers)
In essence, BIP is similar to a Midstream MLP in that BAM is the sponsor that uses its vast global network of industry experts to find high-quality infrastructure investment opportunities (often targeting distressed economies that are temporarily in recession) to achieve very high cash yields on investment.
BIP then uses a combination of retained AFFO, debt, and new equity to purchase stakes in BAM’s deals, which results in a vastly diversified (by geography and industry) wide moat, and very stable recurring source of cash flow with which to secure and grow its generous payout.
Over its first ten years in operations (BIP IPO’d in 2008), the LP has achieved massive growth both in absolute scale, and geographic and industry diversification.
Source: Brookfield Infrastructure investor presentation
This has been due to a mix of both small scale organic growth, as well as large, needle moving acquisitions.
These have helped Brookfield to achieve truly amazing FFO/unit and distribution growth, which has, in turn, resulted in total returns that have not just outpaced traditional utilities and MLPs (by 233% a year), but the market as a whole (by 150% a year).
Currently, BIP owns 35 assets in 15 countries on five continents, including:
- 11,200 km of electrical transmission lines in North and South America.
- 2,000 km of natural gas pipelines in Brazil.
- 2.8 million electricity and natural gas connections (including 680,000 smart meters).
- World’s largest coal export terminal in Australia (85 million metric ton export capacity to China).
- 5,500 km of Australian railroads (effective monopoly in Western and Southwestern Australia).
- 4,800 km of South American railroads.
- 3,600 km of toll roads in Brazil, Peru, Chile, and India.
- 36 port terminals in North America, the UK, the EU, and Australia.
- 15,000 km of natural gas pipelines and 600 billion cubic feet of gas storage capacity in North America.
- 17,800 gas, water, and wastewater connections in Australia.
- 5,000 km of fiber optic cables in France.
- 7,000 telecom towers in France .
95% of its cash flow is either regulated, or under long-term, inflation adjusted, and volume risk limited contracts, thus ensuring maximal safety of the distribution.
In fact, even if Brookfield Infrastructure didn’t acquire new assets, the organic growth potential of its existing ones is enough to generate long-term cash flow (and payout) growth that would be the envy of almost any regulated utility.
In other words, Brookfield Infrastructure is literally the best of all worlds, combining a plethora of diversified wide moat, and cash rich utility and infrastructure assets from around the globe.
However, to truly understand why BIP is potentially the best dividend stock of the next 50 years, you need to understand not just its excellent short-term growth record but also its world class management’s long-term global growth ambitions.
Short-Term Growth That Just Won’t Quit
|Metric||Q3 2017 YoY Growth||YTD 2017 YOY Growth|
|Funds From Operations||28.1%||22.6%|
|Adjusted Funds From Operations||29.0%||19.1%|
|AFFO Payout Ratio||68.9%||70.2%|
Source: Earnings Release, Earnings Supplement
2016 had previously been Brookfield’s biggest growth year ever, with $2.8 billion in fresh investment, but 2017 is on track to smash that record.
Brookfield Infrastructure has, simply put, been on fire this year. Not just with amazing top line growth, but more importantly, strong double-digit growth in adjusted funds from operations or AFFO/share (its equivalent of free cash flow and what funds the payout).
Meanwhile, the transportation segment benefited from 21% FFO growth thanks to a strong recovery in Brazilian toll road traffic as the economy improved.
The energy segment saw 20% FFO growth thanks to improved performance from North American natural gas pipelines that BIP owns as part of a joint venture with Kinder Morgan (KMI).
Finally, on a constant currency basis, recently completed organic growth projects sent communication segment (French telecom towers and fiber optic cables) FFO up 8% YOY.
Even more impressive? Organic FFO growth in constant currency (from expanding existing assets) was up 10%, thanks to $260 million invested into the LP’s organic growth pipeline (mostly its utility segment).
BIP’s organic growth backlog now stands at $2.4 billion (it’s more than doubled in the past two years), which is expected to be completed in the next two to three years.
But wait! There’s more! BIP also has a shadow acquisition backlog of $1.5 billion in opportunistic potential acquisitions in negotiation. This includes a $500 million investment into 2 million smart electric meters, which management is confident will close by the end of the year.
However, this impressive short-term growth absolutely pales in comparison to the riches that Brookfield Infrastructure Partners is likely to be able to secure for investors over the long term.
Massive Long-Term Growth Runway That Stretches For Decades
Going forward, Brookfield is also planning on investing $100 million into two more toll roads in India which will be completed in March of 2018. This will more than double its road network (to 600 KM) in this red hot emerging economy.
Brookfield is particularly interested in India because the growth potential there is mind boggling.
For example, the labor force in India alone is today larger than the combined populations of: the US, the UK, Canada, Australia and New Zealand. And it’s still growing rapidly.
More importantly, India’s fast economic growth means that its middle class (and thus demands on infrastructure) are also growing at a furious pace.
This means that India’s economy is likely to become much larger to the point where its individual cities will have larger economies than many midsized countries today.
All that growth, and extra spending power, is expected to one day make India the world’s largest telecom market (which is why BIP is going after Indian wireless towers).
Of course, India is hardly alone in adopting smartphones with a passion.
In fact, the amount of data the world is generating is growing at such an incredible rate that American Tower (AMT) expects $30 billion a year in wireless infrastructure spending in just the US for the foreseeable future.
And keep in mind that India and wireless are just two of several major megatrends that it’s planning on pursuing over the coming decades.
This focus on skating to where the puck will be in the future is why BIP is also closing on a $15 million Peruvian project. While that may sound like a drop in the bucket for a utility of this size, keep in mind that Brookfield has just recently began targeting water infrastructure.
This is expected to be one of the largest growth markets in the world, in fact, according to Justin Beber, BIP’s managing partner for strategic initiatives:
according to the OECD, there is a $6.7 trillion funding gap for capital to be invested globally in water supply and sanitation by 2050… creating significant opportunity for us… and why growing our water infrastructure presence in a meaningful way is a priority.”
In addition to data, and water, Brookfield is also planning to invest aggressively in upgrading municipal infrastructure in developed markets, which it expects to represent a $3 trillion market opportunity in the US alone by 2025.
And we can’t forget the massive growth that Asia represents, where Brookfield offices are sprouting up like mushrooms.
The bottom line is that Brookfield Infrastructure’s short-term growth opportunities stand at $3.915 billion, ensuring excellent AFFO/unit and distribution growth for at least the next two years.
However, the Brookfield management has its eyes on the long-term prize, and has a clear picture for growing the LP even faster in the coming decade.
To take advantage of the over $36 trillion in total infrastructure investment opportunities Brookfield is predicting in the coming decades (about 3,500 times what BIP has invested to date), it’s going to need A LOT of cheap capital.
Thankfully, it has that in spades.
|Source Of Capital||Capital Weighting (2017)||Cost Of Capital|
|AFFO Yield On Invested Capital||NA||12.8%|
|Net AFFO Cash Yield Spread||NA||9.2%|
Sources: Earnings Release, Earning Supplement
In fact, Brookfield’s access to low cost capital is not just great, but getting better over time.
For example, in the most recent quarter, the LP refinanced $1.4 billion in senior bonds at 4.6%, and also did a rare $1 billion secondary offering (which is when I bought my position).
This means that BIP is now sitting on $3.641 billion in liquidity, nearly enough to fund its entire short-term growth pipeline, on which it’s generating net AFFO yield spreads (cash yield on new investment minus of capital) of 9.2%.
But wait, it gets better. Over time, improved economies of scale have allowed Brookfield to achieve steadily higher AFFO yields on investment.
In addition to buying high-quality assets at rock bottom prices and collecting rich cash yields, Brookfield Infrastructure is also a master at recycling assets, meaning selling them for a profit to invest in further growth.
For example, over the past decade, BIP has sold 8 assets for $2 billion, and generated more than 25% internal rates of return.
In other words, Brookfield has proven itself to be the absolute master of capital allocation.
Which is why I consider BIP to be the Berkshire Hathaway of high-yield dividend stocks and the ultimate “buy and hold forever” high-yield income growth investment.
Payout Profile Is Ideal
|Stock||Yield||AFFO Payout Ratio||10-Year Projected Payout Growth||10-Year Expected Annual Total Returns|
|Brookfield Infrastructure Partners||4.0%||70.2%||8% to 11%||12% to 15%|
Sources: Gurufocus, FAST Graphs, Management Guidance, Multipl.com
Brookfield Infrastructure Partners offers what I consider to be as close as you can get to a perfect payout profile.
This means that not just is the current yield generous (more than double the market’s), but highly secure, thanks to a low AFFO payout ratio. In fact, most regulated utilities have payout ratios of 80% to 85%, and even blue chip REITs and MLPs generally pay out 80% to 90% of AFFO/DCF.
In addition, Brookfield Infrastructure’s distribution safety is greatly benefited by its strong balance sheet.
|Stock||Net Debt/EBITDA||EBITDA/Interest||Debt/Capital||S&P Credit Rating|
|Brookfield Infrastructure Partners||5.4||4.2||39%||BBB+|
Sources: Earnings Supplement, Gurufocus, Morningstar, CSImarketing
Now at first glance, BIP’s leverage seems high. However, you need to consider the debt in the proper context, meaning compared to other highly capital intensive industries and sectors built around long-term contracted, recurring and highly predictable cash flow.
For example, compared to the average regulated utility (which isn’t a pass through stock), Brookfield’s leverage is indeed a bit high. However, compared to the average REIT or MLP, it’s actually low.
In the meantime, the interest coverage ratio is very strong, and its overall debt/capital is below any of these sectors/industries, which helps explain why BIP enjoys a very strong investment grade credit rating.
In fact, few REITs have such a strong rating, and in the MLP space, only two (Enterprise Products Partners and Magellan Midstream Partners) can boast of such high creditworthiness and its commensurate access to cheap capital.
In addition, BIP’s balance sheet is even safer than it looks (when viewed in the proper context). That’s because 85.1% of its debt is non-recourse loans taken out on individual assets.
In other words, the loans are not at the corporate level, where debt covenants can allow creditors to potentially threaten the distribution in a worst case scenario, thus potentially leading to a payout cut.
Rather they are loans where the assets themselves are collateral, and the cash flow from each asset services the debt. In the event that the loan defaults, such as a toll road whose volumes collapse during a recession, the creditors end up foreclosing on the asset, but that’s the end of it.
Or to put another way, BIP has managed to greatly limit its investors’ credit exposure, and in the process, further solidified the safety of the payout.
However, while the current yield, and the distribution security (payout ratio and balance sheet strength) are very important, the true reason to own Brookfield Infrastructure is its epic payout growth prospects.
Management has a long-term 5% to 9% annual distribution growth target, but as you can see, in every full year since its IPO except 2010, the distribution has grown at double digits.
Brookfield’s next annual hike is coming next quarter, and given its stupendous year, I fully expect the quarterly distribution to rise from $0.435 per unit to $0.48. This represents a 10.3% increase and a yield on today’s shares of 4.4%.
In addition, given the excellent short- and long-term growth catalysts, as well as bountiful access to cheap capital, I agree with analysts that over the next decade, BIP is likely to continue underpromising and overdelivering on distribution growth. Specifically, that means continuing to generate 10% to 11% annual payout increases.
That in turn should allow BIP to remain a Wall Street darling and hit management’s long-term total return target of 12% to 15%, with 14% to 15% being the most probable outcome.
Or to put another way, BIP is offering market crushing yield, and long-term total returns, in one of the lowest risk packages you can find today.
Valuation: Still Worth Buying Today
Over the past year, Brookfield Infrastructure has, as usual, crushed utilities, REITs, MLPs, and the S&P 500. However, despite that, I think it’s still worth buying this Grade A dividend growth legend of tomorrow, today.
|P/FFO||Historical P/FFO||Yield||Historical Yield|
Sources: FAST Graphs, Gurufocus
That’s because, while its valuation is richer than its historical norm, both on a P/FFO and yield basis (until the next payout increase), BIP units are not yet at overvalued levels.
|Forward Distribution||Projected 10-Year Payout Growth||Projected Payout Growth In Years 11-20||Fair Value Estimate||Distribution Growth Priced Into Current Unit Cost||Discount To Fair Value|
|$1.74||5% (worst case scenario)||5%||$36.77||7.4%||-19%|
|8% (conservative case)||7%||$43.62||0%|
|11% (analyst expectations and likely scenario)||9%||$52.81||17%|
Sources: FAST Graphs, Gurufocus
That’s based on a long-term (20-year) discounted distribution model that uses a 9.0% discount rate (historically, the annual total return of an S&P 500 ETF net of expenses, since 1871, and thus, the opportunity cost of money) to determine the net present value of future payouts in today’s dollars.
Basically, this analysis tells us that unless you expect Brookfield Infrastructure’s growth to fall off a cliff, and come in at the very bottom of management’s long-term growth guidance, today’s price isn’t actually overvalued.
In fact, based on a conservative assumption, which results in the low end of BIP’s long-term total return guidance (8% payout growth), units appear to be fairly valued.
And if you, like me (and the analyst consensus), think that Brookfield can keep the growth engine humming at close to its historical norms, then today actually represents a very good time to buy one of the highest-quality, high-yield dividend growth stocks in the world.
Risks To Consider
While it’s true that Brookfield Infrastructure is the Warren Buffett of high-yield utility stocks, that doesn’t mean that this is a risk-free stock (such things don’t exist).
For one thing, Brookfield’s management, while the best in the world, is not infallible.
For example, the LP’s planned $200 million investment to buy a stake in 40,000 telecom towers in India was contingent on the merger between Indian telecom giants Reliance Communications and Aircel.
This deal recently fell apart so BIP won’t be closing on this contingent deal, and is now hunting for other telecom tower opportunities on the subcontinent.
In addition, because it operates in so many emerging markets where property rights are not nearly as strong as in developed nations, there is a political and regulatory risk in the form of changes in government (revolutions), resulting in negative affects on its assets.
That could be in the form of contracts being nullified (by populist politicians looking to decrease utility rates) or potentially even outright nationalization.
However, keep in mind that BAM has been operating in many of these countries for decades and is literally the most experienced in the world at avoiding such negative outcomes.
Another risk to keep in mind is that Brookfield Infrastructure’s geographic diversification can be a double-edged sword because it exposes the LP to currency risk.
For example, BIP does business in no fewer than 10 currencies, and even with over $4 billion in hedges, its FFO could still face short- to medium-term volatility.
That’s because 58%, 38%, and 4% of Brookfield Infrastructure’s FFO is in USD, Australian Dollars, and British Pounds, respectively.
Finally, because of how BIP is structured at the corporate level, there is a bit of tax complexity to consider.
For example, in order to make Brookfield Infrastructure Partners safe for owning in IRAs and 401Ks, Brookfield is designed as an LP whose assets are themselves LPs. This is to avoid generating unrelated taxable business income or UBTI.
As MLP investors know, if your IRA or 401K generates more than $1,000 of UBTI in a year, then you have to report and pay taxes on it. This is one of two reasons that MLPs are generally not recommended for tax deferred accounts (the other being that you don’t get the full benefit of ROC portion of payout reducing your cost basis).
However, because of this structure, BIP does generate a K1 form, which some investors hate with a passion due to increased tax preparation headaches.
That’s not to say that owning K1 generating investments (mostly MLPs) isn’t well worth it. For example, I own numerous MLPs and last year Turbotax was able to handle them with ease. In fact, the average time required per form was three to five minutes.
Bottom Line: When It Comes To High-Yield, Low Risk, and Fast Growth, Literally No One Does It Better Than Brookfield
High-yield investors know that utilities are an excellent source of low-risk income, which is especially valuable for those looking to live off dividends during retirement.
And when it comes to utilities, Brookfield Infrastructure Partners is hands down the best in the world.
The high quality, highly diversified (in both geography and industry), long-term, fixed cash flow based business model, when overseen by Brookfield management (the Warren Buffett of hard assets), offers a truly unbeatable long-term investment proposition.
That’s especially true given that despite its already impressive size (which means extremely secure payouts), Brookfield Infrastructure Partners has barely scratched the surface of its true global growth potential.
And while the valuation isn’t a screaming bargain, Brookfield is the epitome of “buying a wonderful company at a fair price” and well worth picking up today.
That’s why I’m wholeheartedly recommending this Grade A utility to anyone who’s looking for the trifecta of dividend stocks (high-yield, low risk, and fast long-term growth).
Disclosure: I am/we are long BIP.
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.