BIPC - Brookfield Infrastructure: A Hard Asset Backed 4.6% Yield

2023-08-14 11:34:50 ET

Summary

• Brookfield Infrastructure is currently paying out a 4.6% dividend yield to its unitholders.
• This has grown at a 5.76% compound annual growth rate since 2020 with the company targeting 7% growth at the midpoint of its dividend growth target range.
• The preferreds are currently trading for 70 cents on the dollar and come with a 7.3% yield on cost.

Brookfield Infrastructure ( BIP ) ( BIPC ) is a $15 billion market cap owner and operator of critical infrastructure from ports to electricity transmission networks and data centers. The company is targeting annual distribution growth of 5% to 9% and last declared a quarterly cash dividend of $0.3825 per share , in line with its prior payout and for a 4.6% annualized forward yield. Important to note, that the difference between the two tickers comes down to the tax treatment and their divergent stock prices. It's the same company with the same cash dividend paid out and backed by the same hard assets, but BIP is a publicly traded limited partnership whilst BIPC is a corporation. Hence, unitholders of BIP have to deal with a K-1 form.

The BIP ticker is currently swapping hands for $33.31 per unit whilst BIPC is currently buyable for nearly $9 higher at $42.43 per share. Hence, the quarterly cash distribution forms a lower 3.6% annualized forward yield for BIPC. The reason for the price divergence is down to their respective tax treatments. However, BIP is not structured as an MLP but rather just an LP with Brookfield stating that it can be owned within the tax-advantaged Roth. Typically, d ividend income from MLPs held within a Roth is considered unrelated business taxable income and is taxable. The dividends have grown at a 5.76% compound annual growth rate from 2020 when $0.3233 was being paid out per quarter. The income is the prize here and the outlook for further growth has not been dimmed by a Fed funds rate hiked to a 22-year high at 5.25% to 5.5%.

Organic Growth From Inflation Indexation Propels Earnings

Brookfield reported revenue of $4.26 billion for its fiscal 2023 second quarter, a 15.8% increase from its year-ago comp and a huge beat of $1.92 billion on consensus estimates. The company owns a diverse range of critical global infrastructure networks across four operating segments; utilities, transport, midstream, and data. These facilitate the movement and storage of energy, water, freight, passengers, and data. Crucially, they generate stable cash flows and are broadly backed by inflation-linked contracts. Funds from operations for the second quarter came in at $552 million , around $0.72 per share and up $0.05 from $0.67 per share in the year-ago comp. However, it did miss consensus estimates by around a penny.

Utilities formed 40.6% of FFO during the quarter and grew by $36 million, around 19% growth, from its year-ago quarter on the back of elevated inflation indexation. Brookfield's commissioning of $500 million of capital into its rate base over the prior 12 months also drove growth as well as results from HomeServe, the UK-based home emergency repairs provider Brookfield acquired for $5 billion back in January. Transport formed the second largest segment with $199 million in FFO, around 36% of the total, generated during the second quarter.

Whilst flat on a year-over-year basis, Brookfield divested its 49% stake in US container terminal operator TraPac in the second quarter of 2022. Driven by inflation-linked rate increases transport would have grown by 5% if TraPac was excluded from the year-ago period. Rates at Brookfield's global toll road portfolio were up by 10% with the company's rail networks passing through increases of 8%. This came on the back of traffic across toll roads increasing by 2% with rail volume being roughly equivalent with its year-ago comp.

Hard Assets Driving Strong Operating Cash Flows

Critically, the July CPI print for inflation at 3.2% came in below market expectations, but still sits far above the Fed's 2% target rate. The company expects its segments to be able to generate organic growth of 6% to 9% perpetually with 3% to 4% inflationary indexation, at least 1% GDP growth upside, and a 2% to 3% uplift from reinvested cash flows set to form the three principle drivers of recurring annual cash flow growth.

The ticker has dipped 20% over the last year with its Class A preferred LP units ( BIP.PA ) down by 10% over the same time frame. These pay out a fixed annual coupon of $1.28125 per share for a 7.3% yield on cost. This is around 270 basis points in excess of the yield on BIP but with the yield on both tickers being above the current CPI print. However, the normal units are below the current core CPI of 4.7%. The long-term opportunity is derived from the 7% forward dividend growth rate target at the midpoint. The preferreds are also an opportunity as they're trading for 70 cents on the dollar. Both yields are buys against what's set to be the continued resiliency of the global economy and against inflation that could be possibly set to stay within their target indexation for longer in certain geographic markets.

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