CA - Brookfield Infrastructure: Yield Matters

2023-12-24 19:00:00 ET

Summary

• Brookfield Infrastructure Partners offers investors a solid dividend yield of nearly 5% on a payout ratio of only 60% to 70%.
• The company invests in attractive infrastructure projects with regulated cash flows leading to FFO growth targets of up to 9%.
• The stock has underperformed in recent years due to investors reaching too far down for yield, but the constant FFO growth aided by the data segment will be rewarding.

Brookfield Infrastructure Partners ( BIP ) is an interesting global infrastructure play offering investors a solid yield again. The stock was a massive gainer over the decade during a low rate period, but the company has drastically underperformed over the last couple of years. My investment thesis is more Bullish on the high-yielding investment firm, but the recent big rally has offset some of the benefits of owning the stock.

Growth Machine

Brookfield Infrastructure offers several forms of investment whether via BIP or Brookfield Infrastructure Corporation ( BIPC ). The major difference is the tax status with BIP investors in the U.S. getting a K-1 form and BIPC investors a 1099 form.

The firm invests in infrastructure projects and pays investors 60% to 70% of the funds from operations ((FFO)) via a quarterly dividend. The company targets projects with 12% to 15% returns and annual FFO growth in the high single digits.

BIP targets global infrastructure projects diversified across mostly regulated industries with consistent cash flows via long-term contracts. The company is highly focused on transportation and utility type businesses with a recent move into data centers.

The company has recently agreed to a deal last year to invest in a major data center via an investment with Intel ( INTC ) for a new fab in Arizona along with buying former Compass and Data4 data centers. These recent deals have the development potential to grow operational capacity from 485 MW to 2,300+ MW by 2028 for nearly 400% growth in just 5 years with planned growth already locked in for nearly tripling operational capacity.

This Data segment only generates $66 million in quarterly FFO currently out of a total of $560 million in Q3. BIP has a clear growth track to make this segment a driver of income and match the $200+ million quarterly FFO from the Utilities and Transport segments.

In general though, BIP now has total assets of nearly $100 billion on the balance sheet, so any one project or sector doesn't move the needle much anymore. The attractiveness of the stock is the consistent dividend payouts from FFO based on current assets with constant capital investments along with pruning assets for attractive valuations.

BIP has grown FFO by ~11% per unit annually over the last decade. The FFO growth feeds the attractive dividend growth with 9% CAGR over the decade and the recent 6% growth in distributions.

Don't Chase Yield

The company has consistently hiked dividends by ~$0.02 per quarter for the last several years with the latest hike in early 2023 offering a 6% dividend boost. The stock now offers a nearly 5% dividend yield, but the dividend yield has been very volatile in the last few years.

The market got overly aggressive on the yield required for an investment. BIP saw the dividend yield dip all the way down to the 3% range leading to massive underperformance for the units over the last 3 years. BIP has seen minimal gains over the period while the S&P 500 has surged.

The stock is far more interesting now with a 5% yield. Going back 10 years, BIP has slightly beaten the S&P 500 with a total return of 231% compared to the 216% return of the S&P 500.

Not surprisingly, the dividend yield was much closer to 5% back in 2014 when the total returns were much more solid. Ultimately though, what matters to investors is the plans and ability to compound up to 9% in annual FFO growth.

The dividend yield just provides a signal of whether the market is overpaying or underpaying for the growth in income. Investors that irrationally chased dividend-paying stocks regardless of the offered yield have suffered below-market performance.

Takeaway

The key investor takeaway is that BIP offers investors a solid dividend yield of nearly 5%, but more importantly, Brookfield offers capital appreciation from this level. Investors missed the opportunity to scoop up the shares extremely cheap, but BIP is still attractively valued trading far below the level of the last few years while the FFO has been growing at a double-digit rate, which is what ultimately derives investment returns over time.

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