BIP - Brookfield Infrastructure Partners: Why This 6.6% Yield Is A Steal

2023-10-26 02:06:14 ET

Summary

• Brookfield Infrastructure Partners' unit price has dropped 40% from its 52-week high, creating an attractive buying opportunity for passive income investors.
• The company has a well-covered dividend and diversified income streams, making the large valuation decline unjustified.
• Brookfield Infrastructure Partners' units are oversold based on the Relative Strength Index, indicating potential for a rebound.

A large decline in the valuation of Brookfield Infrastructure Partners L.P. ( BIP ) is putting passive income investors into a position to buy units at an attractive multiple and yield.

Brookfield Infrastructure Partners’ unit price has tumbled 40% from its 52-week high, primarily over interest rate concerns, and BIP is now selling at a very compelling FFO multiple of 7.6x.

I don’t think that the large valuation decline is justified when taking into account the company’s well-covered dividend and diversified income streams.

Brookfield Infrastructure Partners’ units are also oversold based on the Relative Strength Index.

Diversified Business Model, Multiple Income Streams & Growth Projects

Brookfield Infrastructure Partners is a global infrastructure asset management company with a diverse portfolio of essential infrastructure assets. Brookfield Infrastructure Partners owns and operates critical infrastructure assets such as transportation networks, energy facilities, and data center infrastructure.

Brookfield Infrastructure Partners segregates its business into a number of segments including Utilities, Transport, Midstream, and Data. Brookfield Infrastructure Partners operates globally and its portfolio includes assets for the transmission and distribution of electricity and natural gas, rail operations, toll roads, natural gas and natural gas liquids processing plants, terminals, and other energy and data center assets.

Utilities is the operating segment for Brookfield Infrastructure Partners that produced the largest amount of FFO in the second quarter of 2023: $224 million, or 34% of total FFO (before consideration of corporate expenses).

All of Brookfield Infrastructure Partners' segments together produced $552 million in funds from operations in 2Q-23 which puts the partnership on an annual run-rate FFO basis of roughly $2.1-2.2 billion.

Brookfield Infrastructure Partners is growing its business and its FFO through strategic investments in its different segments, but particularly the data business that I will discuss in just a second.

Based on Brookfield Infrastructure Partners’ forecast for 2023, the partnership expects 13% YoY growth in its FFO this year and grows its FFO to $3.05 per unit by year-end.

The partnership is investing in a number of strategic growth projects, particularly in data centers that are set to profit from increased data transfer volumes.

Brookfield Infrastructure Partners has made a strategic investment in Compass Datacenters recently, a leading data center business, and acquired a stake in the company worth $1.35 billion. The deal is meant to boost Brookfield Infrastructure Partners' fast-expanding data center position in North America and the segment is expected to see a 4.5-fold increase in (estimated) FFO to $135 million between 2022 and 2026.

BIP Is Oversold, Explaining The Selloff

Technical considerations alone are not sufficient for investors to make an investment decision, but they can nonetheless contribute to help make passive income investors an investment decision.

According to the Relative Strength Index, BIP is now heavily oversold with an RSI value of 26.45. The presence of both technically bearish sentiment and a low valuation multiple based on FFO make BIP interesting to me from a valuation and yield point of view.

The rather substantial decrease in the unit price of BIP is primarily due to market concerns over higher interest rates.

High rates have generally weighed on utility/high-yield income stocks and I think that the multiple compression is an expression of such concerns.

With that being said, though, I think the situation is now quite exaggerated now, creating a special kind of buying opportunity for passive income investors.

Distribution Growth And Long Term Pay-Out Ratios

Brookfield Infrastructure Partners has a history of growing its dividend and it is forecasting a total dividend pay-out of $1.53 per unit in the present year.

Between 2013 and 2022, Brookfield Infrastructure Partners paid out 70% of its FFO which leaves a substantial amount of cash flow in the business for Brookfield Infrastructure Partners to invest in new strategic growth projects.

The 70% payout ratio is low enough for me to suggest that the dividend has a high margin of safety, too.

At a present unit price of $23.22, passive income investors can lock in a distribution yield of 6.6%. In the last decade, Brookfield Infrastructure Partners grew its dividend by 8% annual, on average, and the partnership sees 12% annual FFO growth for the next 1-3 years which I would suspect will allow for high-single digit dividend growth in the short-term.

Bargain FFO Multiple And High Margin Of Safety

With $3.05 per unit in FFO expected by the end of the year, Brookfield Infrastructure Partners’ units are presently selling for an FFO multiple of 7.6x, which is extraordinarily cheap considering that the partnership’s FFO outlook has not changed.

Passive income investors that bought into the energy company in September paid ~10.5x FFO. The valuation multiple, in my view, contains a high margin of safety since the re-rating seems to have been driven primarily by higher interest rates.

Why Brookfield Infrastructure Partners Might See A Lower/Higher Valuation Multiple

Brookfield Infrastructure Partners has suffered selling pressure, but the business appears to function and perform well.

High interest rates, in my view, are a poor excuse to shave 40% off of BIP’s market value. High-yield income stocks including utilities are not at the top of investors’ buying lists right now which is exactly why I like BIP.

Slowing FFO growth, particularly in the data center segment, and moderating dividend growth are potential headwinds that investors might want to consider.

My Conclusion

Brookfield Infrastructure Partners, in my view, is a compelling passive income investment after a 40% price plunge as investors appear to react too emotionally to the present state of the interest rate environment.

BIP is seeing double-digit FFO growth in the near future and continues to plan with $3.05 per unit in FFO this year (implying 13% YoY growth). Thus, passive income investors can lock in a solidly covered 6.6% dividend yield by paying only 7.6x FFO. Buy.

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