When Brookfield Infrastructure Partners LP announced last week that it was raising $1-billion (U.S.) through an equity offering, its units fell more than 4 per cent on the news, snuffing out a promising rally that had begun a month earlier.
Investors may have pouted about this setback (full disclosure: I'm an investor and I pouted like a toddler). But a deeper look at Brookfield's extensive track record for issuing new equity reveals why this latest offering is actually good news in the longer term: The company has a track record of making good use of the additional cash.
Brookfield Infrastructure was spun out of Brookfield Asset Management Inc. nearly a decade ago with a trove of stable, cash-generating global infrastructure assets spanning electricity transmission lines, ports, railway tracks, toll roads and pipelines.
Since 2009, the units – which trade in New York and Toronto – have delivered a total annualized return of 27 per cent. And dividend-loving investors have seen per-unit cash distributions rise by an average of 12 per cent a year, exceeding the company's estimates for annual dividend growth of 5 per cent to 9 per cent.
Along this journey, Brookfield Infrastructure has announced a remarkable seven equity offerings – or nearly one per year – totalling more than $5-billion.
It is not unusual for companies to issue additional equity occasionally. They can use the money to pay down debt, finance expansion or simply stockpile capital. Generally, though, the new equity is issued at a discount to the recent share price to make the deal palatable to underwriters. This can cause some turbulence.
In the case of Brookfield's latest offering, the new units (essentially shares) were priced at about a 4-per-cent discount, which probably explains the 4-per-cent dip in the unit price after the announcement was made.
Besides the near-term turbulence in price, some investors believe that equity offerings dilute their share of profits, since there are now more shares outstanding. In their view, this dilution makes the investment less attractive.
But done right, equity offerings can be good and Brookfield Infrastructure does it right.
For one thing, management has a knack for announcing offerings following a strong rally in the unit price.
Prior to this week's offering, the units were up 25 per cent since December. In November, 2016, when Brookfield announced a $750-million offering, the units had risen about 45 per cent since mid-January. And a $950-million offering in 2015 followed a 40-per-cent rally over the previous six months.
Do you see the pattern here?
Offering units when the going is good suggests that Brookfield is shrewd about getting full value for the new units, which is good for its coffers. And the higher unit price should more than offset any concerns about dilution.
Best of all, Brookfield puts the new money from the equity offerings to good use: It has been rewarding investors by generating more cash and paying a bigger quarterly payout, which tends to drive up the unit price.
The previous equity offering, in November, was specifically tied to Brookfield's stake in Nova Transportadora do Sudeste SA, a Brazilian natural gas pipeline.
The current offering, which was announced last Monday, is more vague. According to a release, Brookfield will use the proceeds "to fund a growing backlog of committed organic-growth capital-expenditure projects, an active pipeline of new investment opportunities and for general working capital purposes."
In a recent interview with The Globe and Mail, Sam Pollock, Brookfield Infrastructure's chief executive, noted that this backlog stands at $2.4-billion and could rise by another $2-billion within a year.
So, be prepared for more equity offerings ahead. But don't fear them: After an initial dip, Brookfield units tend to rebound relatively fast.
For example, after falling 3.7 per cent after the November equity offering, the units then rallied more than 30 per cent by August.
No wonder. The company's second-quarter financial results, released in August, showed that funds from operations – the amount of cash generated, which influences the quarterly payout – rose 28 per cent over last year. In other words, Brookfield's investment in that Brazilian natural gas pipeline is already paying off.
The units, which fell to March levels early last week before rallying at the end of the day on Friday, still look attractive. Just as the company takes advantage of a rising unit price by issuing new equity, it makes sense to take advantage of a falling unit price by buying. If not now, then perhaps the next time Brookfield announces an equity offering.