John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
For the past few months I've been carrying a chunk of cash in my Strategy Lab model dividend portfolio. Now, I'm going to put most of that "money" to work.
Regular readers of Yield Hog will know that I'm a fan of Brookfield Infrastructure Partners LP. I own the units personally and they've rewarded me with solid capital gains and steadily rising distribution. And I believe there's more where that came from.
So today I'm adding Brookfield Infrastructure to my Strategy Lab model dividend portfolio. Based on Tuesday's closing price of $53.30, the 120 units I'm purchasing will cost me $6,396.
In the short run, I have no idea what will happen to the unit price. However, given growing global demand for high-quality infrastructure assets, I'm confident that over the long run the partnership will generate rising cash flow and distributions that will ultimately push the price higher.
Here's why:
It's a play on the global economy
Brookfield owns a portfolio of long-life assets that are essential to the economy, including utilities, railways, ports, toll roads, communications towers and pipelines. The operations are diversified geographically, spanning North and South America, Europe and Australia, and the cash flows are relatively predictable because about 90 per cent are either regulated or governed by long-term contracts (and in many cases linked to inflation). What's more, the operations tend to have high barriers to entry and limited competition, which can increase their value over time.
It's poised for growth
Brookfield Infrastructure is constantly expanding and upgrading its existing businesses – widening toll roads in South America, for example, or expanding capacity at its ports in North America and Europe – to meet growing demand and generate higher returns. And it's always on the lookout for new opportunities, such as its recent acquisition of a stake in TDF, which operates 6,690 communications towers in France serving broadcasters and telecommunications providers.
According to McKinsey & Co., the global economy will require an estimated $57-trillion (U.S.) of infrastructure investment between 2013 and 2030. For Brookfield Infrastructure, there will be no shortage of opportunities.
"We currently have seven transactions that are quite advanced," chief executive officer Sam Pollock said on Tuesday's first-quarter conference call. They include the potential purchase of a stake in Invepar, a company that owns toll roads in Brazil and Peru, rapid transit systems in Rio de Janeiro and a controlling stake in Sao Paulo's main airport – the largest in South America. In total, Brookfield Infrastructure could invest up to $2-billion in Brazilian assets over the next six to 18 months, Mr. Pollock said.
The distribution is rising
Brookfield Infrastructure's goal is to increase its distribution by 5 per cent to 9 per cent annually, but over the past few years it has exceeded that target, including a 10.4-per-cent increase announced in February. The yield of 4.8 per cent is also attractive. Keep in mind that Brookfield Infrastructure declares distributions in U.S. dollars, and – because it's a Bermuda-based limited partnership – the distributions consist primarily of foreign dividend and interest income (based on the 2014 tax breakdown). As I've written before, I avoid the tax headaches by holding BIP.UN in my registered retirement savings plan.
The distribution payout ratio is conservative
The partnership aims to pay out 60 per cent to 70 per cent of funds from operations (FFO), a measure of cash flow that excludes depreciation, amortization and other non-cash items. For the first quarter, the payout ratio was 68 per cent – at the high end of the target range – but this was after the recent distribution increase and does not include the communications assets in France, which are expected to "make a meaningful contribution to our results," the first-quarter press release said. Another reason for the elevated payout ratio is that FFO was flat at $186-million, or 89 cents a unit, for the first quarter. But this was largely a reflection of unfavourable currency moves; on a constant currency basis FFO rose 11 per cent.
The balance sheet is strong
Brookfield Infrastructure's corporate debt has an investment grade credit rating of BBB-plus from Standard & Poor's. In the past two years the partnership has refinanced most of its debt to benefit from low interest rates and extend maturities on its bonds, the average term of which is now 10 years. Further strengthening its balance sheet, the company recently raised $950-million of equity through a combination of a public offering and a private placement with parent Brookfield Asset Management. Including a recent preferred share and corporate bond issue, Brookfield Infrastructure has raised about $1.4-billion which, combined with its existing resources, gives it about $2.3-billion of liquidity to pursue investment opportunities.
Closing thoughts
Every investment comes with risks, but given the essential nature of Brookfield Infrastructure's assets and their largely regulated or contracted cash flows, the units are on the conservative end of the spectrum. Be sure to do your own due diligence, including an analysis of the tax consequences, before investing in any security.
John Heinzl