John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Consider all of the infrastructure the global economy needs to operate – railways, ports, utilities, roads, energy pipelines. Without these essential assets the economy would basically shut down.
That's one of the main reasons I like Brookfield Infrastructure Partners LP: It has a stake in all of them.
Infrastructure assets are generally long-lived, throw off steady cash flows and often face limited competition. They're not risk free – no equity investment is – but they're on the conservative end of the spectrum.
Here are some other things I like about BIP (disclosure: I own the units personally).
Its distribution is growing
When BIP announced fourth-quarter results on Feb. 5, it raised the distribution by 12 per cent – more than analysts expected. It was the sixth increase in the past four years and it almost certainly won't be the last. "We continue to expect BIP to increase distributions annually at a level close to 10 per cent for the foreseeable future," RBC Dominion Securities analyst Robert Kwan said in a note. With the most recent increase, the units now yield about 5.2 per cent. Keep in mind that, as a limited partnership, BIP's distributions (which are in U.S. dollars) are taxed differently than dividends. More on that online here.
The payout ratio is conservative
BIP targets a payout ratio of 60 to 70 per cent of funds from operations (FFO), a measure of cash flow. However, even with the recent distribution increase, BIP's payout ratio for 2014 will be about 54 per cent, analyst Benoit Laprade of Scotia Capital said in a note. That provides a good buffer for the current dividend and leaves lots of room for further increases.
The operations are diversified
BIP's operations span North and South America, Europe, Australia and New Zealand, providing good geographic diversity. What's more, based on 2013 results about 47 per cent of earnings before interest, taxes, depreciation and amortization (EBITDA) is from low-risk regulated operations while 42 per cent is governed by long-term contracts, providing stability and predictability.
The company is growing
For 2013, BIP posted a 37-per-cent increase in FFO per unit, driven by a combination of organic growth and acquisitions. During the year, BIP expanded its railway operations in Australia, acquired a utility distribution business in the U.K., increased its stake in its electricity transmission system in Chile and boosted its ownership in a company that operates toll roads in Brazil.
One disappointment was the energy division, where FFO fell about 8 per cent, reflecting weakness in the natural gas transmission business in North America.
More growth is on the way. In December, the company agreed to invest a total of about $500-million (U.S.) in a rail and port operator in Brazil and in container terminals in Los Angeles and Oakland, Calif.
Returns have been impressive
BIP was spun off from Brookfield Asset Management Inc. and began trading on the New York Stock Exchange in 2008.
Since the units were listed on the Toronto Stock Exchange in September, 2009, they have posted an annualized total return of 26.5 per cent, including distributions, compared with 7.7 per cent for the S&P/TSX composite index.
Don't count on such outsized gains continuing. With the slowdown in emerging markets, currency unpredictability and growing competition for infrastructure assets all potential headwinds, BIP's share price is not without risks.
Indeed, while five of eight analysts have a "buy" on the shares, there are three "holds" and one "sell."
The average 12-month price target is about $45 (Canadian), compared with BIP's close of $41.30 on the TSX on Tuesday.
Despite the potential for share price volatility, given the company's strong cash flow growth, attractive dividend and solid track record of making profitable infrastructure investments, it will likely be rewarding investors with growing distributions for many years to come.
John Heinzl