John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
I like to avoid unpleasant surprises with my investments, which is why I stick with conservative, dividend-paying companies.
But pleasant surprises? I'll take those all day long.
Which brings us to today's topic: Brookfield Infrastructure Partners LP.
Back in May, 2015, I added Brookfield Infrastructure (hereafter referred to as BIP) to my Strategy Lab model dividend portfolio. I liked the fact that BIP's assets – including utilities, ports, toll roads, railways and pipelines – throw off predictable and growing cash flows, have high barriers to entry and are essential to the economy.
Recognizing BIP's outstanding growth prospects in a world that requires trillions of dollars of infrastructure investments, I increased my position in June, 2016, and now hold 145 units in my model portfolio (disclosure: I also own the units personally).
My timing for that second purchase couldn't have been better.
On Aug. 3, BIP announced solid second-quarter results – including an 11-per-cent increase in funds from operations – that were largely in line with analysts' estimates. The pleasant surprise was a 3.5-per-cent distribution increase that came just six months after BIP announced a 7.5-per-cent hike in February.
In hindsight, maybe I shouldn't have been surprised. BIP had previously indicated that, subject to meeting certain capital deployment goals, its total distribution growth in 2016 could exceed its annual target of 5 to 9 per cent. The hike announced this month brought the cumulative increase for 2016 to a hefty 11 per cent.
And there's likely more to come. BIP signalled that another significant distribution increase is possible in the first quarter of 2017 when the partnership plans to review its distribution again.
"Should we continue to execute our current growth initiatives as anticipated, we believe that our next increase may be at the higher end of our annual distribution growth range," chief executive officer Sam Pollock said in the second-quarter letter to unitholders. (BIP also announced a three-for-two unit split in conjunction with the second-quarter results).
What's driving BIP's growth? A bunch of things.
For starters, its U.S. natural gas pipeline business is benefiting from numerous expansion projects. These include construction of additional compression facilities in the Chicago area by the end of 2016, a reversal project on the company's Gulf Coast line and potential expansion into Mexico.
Another key growth driver for BIP is the recent acquisition, with partners, of Australian port and rail logistics operator Asciano Ltd. The Asciano deal, in which BIP is investing $350-million (U.S.), is expected to close by the end of August.
BIP is also expanding aggressively in South America, where it is aiming to build on its already significant presence in transportation and energy infrastructure.
Complementing its toll roads in Chile and Brazil, BIP recently acquired – along with institutional investors – a 57-per-cent stake in Rutas de Lima, which operates a network of toll roads in Peru's largest city. BIP – which is investing $130-million – called Peru's economy "one of the most robust in Latin America" and said it has "identified further expansion projects [in Lima] that would provide accretive returns."
Brazil – a country racked by political turmoil and a prolonged economic slump – is another key focus of BIP's growth.
"While investor sentiment has generally been negative on the country, we are taking a contrarian view and investing in high-quality franchises that in normal periods would not be available at a reasonable value," Mr. Pollock said. Despite Brazil's current challenges, its economy still has "significant growth potential" and "solid underlying fundamentals," he said.
Among deals it is pursuing in Brazil, BIP is in exclusive discussions to acquire key pipelines from troubled state-run energy company Petroleo Brasileiro SA (Petrobras). These pipelines are the sole supplier of natural gas to the heavily populated states of Sao Paulo, Rio de Janeiro and Minas Gerais in south-central Brazil and offer potentially attractive returns.
"We expect BIP will be successful investing at least $700-million and earn returns in the mid-teens from these fully contracted assets," Raymond James analyst Frederic Bastien said in a note in which he reiterated his "strong buy" rating on the units.
BIP is also re-entering Brazil's electricity transmission sector in a big way. It has about 2,800 kilometres of new transmission projects under way and is in discussions with several potential sellers of existing assets. Its goal is to invest about $200-million over the next few years and build a business with "substantial scale," complementing BIP's 10,000 kilometres of power transmission lines in Chile.
BIP's share price has had a big run recently – it's up about 24 per cent in 2016 – but Mr. Bastien believes there's more upside. He has a U.S. target price of $54 – about 9 per cent higher than Tuesday's close of $49.56 on the New York Stock Exchange. On the Toronto Stock Exchange, the units closed Tuesday at $65.00 (Canadian).
It's anyone's guess what BIP's unit price will do in the short run. But given BIP's attractive yield of about 4.8 per cent, its ambitious global growth plans and the potential for further distribution hikes, I'm happy to go along for the ride. Remember to do your own due diligence as there are risks with every stock.