Brookfield Asset Management Inc. CEO Bruce Flatt continues to sound notes of caution about the global economy, but says the company sees itself ramping up the amount of cash it will generate in the coming years, with stock buybacks and perhaps an increased dividend to follow.
In a letter to shareholders released Thursday, along with the company’s second-quarter earnings, Mr. Flatt notes Brookfield’s projections that it will produce more than US$5-billion in cash a year by 2023 – more than double 2019’s forecast of US$2.55-billion and a fivefold increase from 2015. The numbers don’t include results from distressed-debt investor Oaktree Capital Group LLC, which Brookfield intends to acquire this quarter.
“Our Free Cash Flow is expected to grow steadily and in the absence of something more beneficial, we will increasingly return this cash to shareholders through increased share buybacks (our preferred choice) or increased dividends,” Mr. Flatt wrote. (Brookfield’s “free cash flow” is a combination of a “funds from operations” earnings metric, plus some realized gains on asset sales and distributions from investments.)
The numbers serve to underscore the colossus that Brookfield has become. The company runs a series of multibillion-dollar partnerships for institutional investors, making deals in infrastructure, energy, real estate and any other business where Brookfield thinks its scale and longer-term approach can create value.
At the end of the second quarter, Brookfield had US$385-billion in assets under management, with the Oaktree deal promising to jack up the number above US$500-billion. Brookfield has US$15-billion ready to invest, with its partners standing by with an additional US$35-billion in committed capital.
Brookfield raised US$19-billion of capital for its funds in the quarter, bringing the total to US$40-billion over the past 12 months, and now has more than 700 institutional investors as clients.
In the second quarter, Brookfield also launched a Special Opportunities program with $1-billion of investor capital, with a target of approximately $5-billion. Brookfield said the program can invest in a range of opportunities “that fall outside the investment mandates of our existing private funds.” In the company’s earnings call, Mr. Flatt said potential investments include deals in which Brookfield does not control the target company, unlike the typical deal today.
However, Mr. Flatt noted once again, there’s a lot of capital chasing a limited number of deals. “Capital is freely available both in the credit and equity markets,” he wrote. “Global sovereign and institutional investors continue to increase allocations to the types of assets we invest in for them. While good for our capital raising activities, this has commensurately increased capital to other sponsors like us, and therefore increased competition for investments.”
Brookfield believes it can generate strong results anyway owing to its size, global reach and operating skills.
Mr. Flatt has repeatedly cautioned that we are deep into an economic expansion, and Brookfield is prepared should the global economy turn – although he has not been forecasting an imminent recession.
In Thursday’s letter, Mr. Flatt sounded a number of optimistic notes, saying the global business environment “continues to be constructive despite the constant political distractions.” The U.S. economy “is slowing but still remarkably resilient, and with interest rate reductions started, should stay positive in the short term.” Europe, while decelerating, is in much better shape than a few years ago. Asia is being hit with an export slowdown, he said, but will still grow at strong rates on a relative basis.
In the second quarter, Brookfield’s net income dropped sharply to US$704-million from US$1.66-billion in the prior year. Earnings per share available to common shareholders, which backs out the roughly half of net income attributable to the partner owners of Brookfield’s investments, was 36 US cents a share, compared with 62 US cents a share in the prior year. The prior year included a number of one-time gains, Brookfield said.
“Cash available for distribution and/or reinvestment,” a measure analogous to Brookfield’s free-cash projections, was US$599-million in the quarter, up from US$450-million in 2018’s second quarter.
Funds from operations, an earnings metric that attempts to quantify cash available to Brookfield common shareholders, rose to US$1.11-billion in 2019’s first quarter from US$790-million in the prior-year period.
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