CA - Brookfield Infrastructure: A Secure Dividend And Global Infrastructure Investments

2023-12-07 14:49:44 ET

Summary

• Brookfield Infrastructure specializes in investing in infrastructure companies and offers a 5.6% yield, making it attractive for long-term investors.
• BIP focuses on acquiring high-quality assets, enhancing and streamlining businesses, and recycling assets for growth.
• The data sector is expected to be a major source of growth for BIP, with an anticipated IRR of ~20% and investments of $1.5 billion in data-related businesses.

Often overlooked is the value of the infrastructure that we use and rely on every single day. One of the best in the business at identifying value with respect to infrastructure is Brookfield Infrastructure Partners ( BIP ). Part of the Brookfield empire led by Bruce Flatt, they specialize in investing in infrastructure companies. Sporting a 5.6% yield, I think the company is extremely attractive to hold for the long run while collecting potential modest capital gains growth. Thanks to strong FFO, BIP has had 14 straight years of dividend increases, and that's about to be 15 years in 2024.

Before I dive into it, Brookfield Infrastructure can be bought in two forms, ( BIP ) or ( BIPC ). The only real difference is the tax situation. BIPC offers a 1099 Form. BIP investors in the U.S. are subject to a K-1 form. Due to higher demand from non-Canadian investors, they offer an option with a better tax situation. Some institutional investors cannot invest in a partnership, which opens up a wider funnel for Brookfield. The dividend is the same. Everything I write about applies to both tickers. Which one you choose depends on your situation.

We will always require infrastructure in one form or another. Why invest anywhere else than one of the best at identifying and maximizing value in the infrastructure space? BIP will continue to adapt to the environment and make money in whatever sector it may be. I am long BIP and don't plan on selling anytime soon.

What Is Brookfield Infrastructure?

In short , they strive "to own and operate a globally diversified portfolio of high-quality infrastructure assets that will generate sustainable and growing distributions over the long term."

They have 11 corporate offices across the globe and over 47,000 employees. 50% of the business is based in North America, but the rest is spread across South America, Europe, Asia, and Australia rather equally. Looking below you can get a reference for how the four main sectors they operate in (Utilities, Transport, Midstream, and Data) stack up and contribute to the whole.

BIP works in three stages. Firstly, they target and acquire high-quality assets on a value basis. Then they enhance and streamline the business by cutting out the clutter and eliminating bureaucracy, aligning profit and loss accountability, and setting the tone from above. Once the major growth has been captured, they look to recycle the assets and start the process all over again. They target 12-15% IRR. Looking below, you can see just how this works out. Over the last 3 years, they generated $4.5 billion of proceeds from 16 asset sales completed at a combined ~70% premium to the IFRS carrying value. BIP has done some exceptional work, and that isn't about to change.

What's The Big Focus?

Believe it or not, most of the growth will likely come out of the data sector. Even though it currently only accounts for 9% of FFO, looking below you can see that it should really ramp up over the next few years. They are anticipating 2,300+ MW of capacity by 2028 . The best part of this is that the expected IRR for BIP is ~20%, which is well above what is typically expected.

There isn't any doubt that data is what drives the world today, and BIP is going to capitalize on it. While many of the investments BIP makes wouldn't classify as "sexy" to the younger generations, the data investments definitely fit that mark. They have invested $1.5 billion this year in three separate data-related businesses.

• North American Data Center Platform - $375 million
• European Data Center Platform - $475 million
• European Telecom Tower Platform - $700 million

Check out their November 2023 corporate profile for a deeper look at some of the investments they have made in 2023. These investments will continue to help fund the lucrative dividend in my view.

Did Somebody Say Dividend?

Currently yielding just under 6%, it is well into the upper echelon of the market (need 4.8% to get into the top 25%). If you have read any of my articles on pipelines Energy Transfer ( ET ) or Enbridge ( ENB ), you will see a similar trend here. Infrastructure companies calculate the safety of the dividend in very different measures than the average stock, this is because net income is somewhat irrelevant due to the depreciation of assets. This drags on net income overall and makes things look worse than they are. For example, looking at BIP's standard payout ratio, you will see the ratio sitting at 424%, which screams cut. However, we need to refocus on FFO (funds from operations) for it is FFO that has driven the company to increase its dividend for 14 straight years. Expecting to payout $1.53 per share this year, you can see the growth below. We saw a 6% increase year-over-year in the dividend, and that's expected to continue going forward.

The target payout range is between 60-70% of FFO. Looking below, you will see that the company has historically operated on the lower end of that range. This is mostly because the increase comes from last year's work. You'll notice the dividend increase usually takes place in Q1. If we take the expected $3.05, based on the $1.53 dividend, we are only at 50%. It's for this reason that I expect to see an 8-10% dividend increase in 2024. That would move the distribution north of $1.65 and still have the ratio below 60%. I am perfectly okay with a payout ratio on the lower end given how volatile the market has been as of late.

If you still aren't convinced the dividend is safe, check out the FFO stability below. 10% of the FFO in 2023 was subject to market movements. The bulk of which is due to their midstream exposure. This is why we saw a decline in FFO in the midstream sector year-over-year in Q3. You can thank commodity prices for that one! On the bright side, 70% has no exposure. Now that's good business, and that's why you have to look beyond the standard payout metrics. On top of that, 80% of the FFO is inflation-indexed or protected. Only 20% is exposed to the volatility we have seen in the last year.

All in all, with a company that is going to continue to grow FFO (12% CAGR next 1-3 years), and distribute 55-65% of that to shareholders, it's a hard opportunity to pass up on. I believe this is a stock you can either buy a chunk of and tuck away for years to come, or continuously add to. I would bet you'll be a happy camper years down the road as you watch the dividends pile up.

What Does The Price Say?

While the dividend may be the main attraction here, you want to make sure your base investment will continue to grow going forward, or make sure you're not buying at the top. Currently trading at $27 and change, my price target for 2024 is $31.

Looking above, you can see that $31 is an area where we have seen support in the past. As soon as we broke through $31 in late September, we crashed down to the lows we recently witnessed. You will also notice the orange line. That is the 200-day moving average. Keep an eye on this line. You can see it has often been a good indicator of support and resistance. While I don't anticipate we rocket up to test that level right away, I do think we will test it shortly. As we sit today, it rides right along my current target price.

Wall Street has an average price target of just over $37 . As a shareholder, I am all for it. But I do think it could be a while before we see that number. Looking below, you can see that the target price does have a good history concerning previous support and resistance. But, I do think we will see some turbulence at other levels before getting to $37.75. I much prefer to set shorter-term price targets and re-evaluate them. The world is extremely volatile, and any new development or election could shift the future of any stock, never mind infrastructure-based ones like BIP.

As always, you need a stop in place to protect capital. My current stop is $24.91. This leaves about 10% room to the downside. With the main driver being the dividend, I want to make sure I can have the most cash exposure as possible to collect as much as I can. This means keeping a tight stop. Should BIP fall below that mark, I would sell my stake and re-evaluate. I can always buy back in when the stock sets up better. I don't want to have capital trapped in a loser.

Wrap-Up

As you can see, there is a lot to like about what is going on at Brookfield Infrastructure Partners. The company has a strong history of finding companies to invest in, and then changing the company for the better before selling it off for a quality return. BIP is focused on where the world is going with respect to its recent investments in the data world. This is a bonus to an already very strong portfolio. While I do see growth here long term, the real treat is the dividend. It is very secure and only going to continue to grow as FFO grows over the next few years. I'm expecting to see an 8-10% dividend increase in Q1 of 2024. This should also help propel the stock up towards my $31 target. I am invested in BIP for the long run.

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