CA - Brookfield Infrastructure: A Resolute 4.8% Yield In These Trying Times

2023-03-16 21:18:34 ET

Summary

• Brookfield Infrastructure Partners is paying out a 4.8% yield from a portfolio of highly cash-generative essential infrastructure assets.
• Fiscal 2022 fourth quarter FFO covered its dividend payout by 64% with BIP targeting dividend growth of 5% to 9% in perpetuity.
• The Series A preferreds offer a 7.55% yield on cost and are trading at a 32% discount to par.

Brookfield Infrastructure Partners ( BIP ) last declared a quarterly cash dividend of $0.3825 per share , a 6% increase from its prior payout and for a 4.8% yield. This yield is a buy against what has been the heavy disruption of the equity markets in recent weeks. I've described the yield as resolute because BIP's portfolio is highly diversified across utilities, transport, midstream, and data and the company is targeting a dividend growth rate of 5% to 9% per year on the back of its high-quality global assets. Dividend for the last 3 years has come in at a compound annual growth rate of 5.68% , matching the company's target rate and outperforming its peer group median growth rate by 13.59%.

The yield has been climbing in recent months on the back of common shares that have fallen by around 21% over the last year. This has been due to still rising Feds funds rates creating an environment where lower-risk options with distributions rate on par with BIP have sprung up. Indeed, SOFR now stands at 4.55% and newly issued sub-investment grade bonds and preferred shares would have to reflect this.

The opportunity here is the 7% forward dividend growth potential at the midpoint of the company's growth target. Not only is this in excess of the currently elevated level of inflation at 6%, but it also comes with a healthy 64% payout ratio against an FFO of $0.72 per share for BIP's last reported fiscal 2022 fourth quarter. The 6% dividend increase forms the 14th consecutive year of BIP increasing its distribution. I expect this upward trend to continue with BIP's management looking to realize net proceeds of $2 billion from asset sales through 2023. This will be aggregated with a liquidity position of $3.4 billion as of the end of the fourth quarter.

FFO Is Moving Higher With Further Dividend Raises In View

BIP reported FFO of $556 million for its fiscal 2022 fourth quarter; This was around $0.72 per share and was a 10.8% increase from the year-ago comp of $0.67 per share. This was on the back of revenue growing by 14.2% year-over-year to $3.71 billion. BIP's large operating scale and material asset diversification form two of its core strengths. Its asset diversification helps mitigate regulatory and counterparty risk with this further diversified across geographies.

Hence, whilst transport formed 31% of fiscal 2022 FFO of $2.71 per share, this asset base is further diversified across operating companies in North America, Western Europe, South America, and Asia Pacific. Despite the strong results, which saw record FFO, BIP stock price continued to reflect market angst around rising Fed funds rates. The company's price-to-FFO now stands at 11.7x, down from its year-ago figure of 16.5x. Hence, predictable cash flows from its operating assets against the lowered multiple, robust growth target, and liquidity position render the commons as a strong investment.

The Series A Preferred Shares

BIP offers another investment option in the form of its 5.125% Class A Preferred Shares ( BIP.PA ). These are attractive for several reasons. Firstly, they come with a 7.55% yield on cost as they currently trade at $17 versus an annual coupon of $1.28125 per share. This yield is around 273 basis points higher than the yield on the common shares, a rare dynamic as the preferreds are intrinsically safer.

Secondly, they're cumulative, a term which describes an obligation on BIP to repay the annual coupon in the event they're ever suspended. This essentially reduces the propensity of a suspension against scenarios where the company experiences material financial stress. The Series A preferreds are also trading at an $8 per share discount to their $25 par value. This is a 32% discount to their redemption value and fundamentally represents a material margin of safety for prospective investors in the preferreds.

Further, with both BIP and its preferreds rated investment grade , the overall safety of the quarterly Series A payments seems guaranteed. They come up for redemption just over two years and a half years from now on October 15, 2025, and will trade in perpetuity after this date if BIP chooses not to redeem them. However, as these were issued when SOFR was essentially at zero, the likelihood of the company being able to refinance at a lower rate at this time increases the likelihood of the Series A trading for a while after its redemption date.

Critically, both the Series A preferreds and the commons would form a good income investment in these trying times characterized by near-constant crisis from the pandemic to record inflation, Russia's war on Ukraine, and a mini banking panic. However, I'm leaning towards the commons on the back of their dividend growth profile.

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