John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
It has been a little more than a year since I added Brookfield Infrastructure Partners LP to my Strategy Lab model dividend portfolio.
Today, I'll recap how the units have performed and then discuss why the future looks bright for this global infrastructure player, whose assets includes railways, ports, utilities, toll roads, pipelines and communications towers.
On May 4, 2015, I "purchased" units of Brookfield Infrastructure (BIP.UN-TSX) at $53.30 for my model portfolio. The units closed on Tuesday at $55.96 on the Toronto Stock Exchange, for a gain of 5 per cent on price alone.
I'm pleased with that performance, but it's not the whole story.
The total return – a theoretical measure that includes distributions and assumes they were reinvested in additional units – was 8.8 per cent, which beat the total return of negative 6.2 per cent for the S&P/TSX composite index over the same period.
One of the main reasons I bought Brookfield Infrastructure was its rising distribution and the partnership didn't let me down. In early February, it hiked its quarterly payment by 7.5 per cent to 57 cents (U.S.) a unit – the eighth increase since Brookfield Infrastructure was spun off from Brookfield Asset Management Inc., in 2008.
Based on the new distribution of $2.28 annually – or about $2.99 (Canadian) – the units yield an attractive 5.3 per cent. (Brookfield Infrastructure declares distributions in U.S. dollars, but trades on both the Toronto and New York stock exchanges, so if you're calculating the yield yourself, be sure to use the same currency for the distribution and the share price.)
As I wrote when I purchased the units (read the column), another reason I like Brookfield Infrastructure is that its assets throw off reliable cash flows that tend to rise over time. What's more, the assets are diversified by geography and industry, have high barriers to entry and are usually regulated or contracted on a long-term basis, which minimizes competition and contributes to stability of returns.
One year later, my thesis hasn't changed. Based on the partnership's recent results and management's comments, I expect that the business – and the distribution – will continue to grow through a combination of acquisitions and organic investment.
For the first quarter ended March 31, Brookfield Infrastructure reported funds from operations or FFO (essentially profit less depreciation, amortization and other non-cash items) of $234-million (U.S.) or $1.02 a unit, up from $186-million or 89 cents a year earlier. Despite the outsized yield, the distribution appears very safe: The payout ratio for the quarter was 65 per cent of FFO – the midpoint of management's target range of 60 to 70 per cent.
Brookfield Infrastructure has said it aims to increase its distribution by 5 to 9 per cent annually and given the company's projected growth, I expect it will meet – if not exceed – that goal.
Currently, it has three "advanced transactions" in which it expects to deploy a total of about $500-million of capital: The acquisition (with various partners) of Asciano, an Australian port and rail logistics business; the privatization of Brookfield Infrastructure's Brazilian toll roads business; and the acquisition of Niska Gas Storage in North America.
In addition, Brookfield Infrastructure is re-entering the electricity transmission business in Brazil, where it has initiated several projects and aims to build a business with "substantial scale."
Existing businesses are also contributing to growth in a big way. With a record backlog of $1.7-billion in committed organic growth projects – including the rollout of smart meters in Britain, gas pipeline expansions in the United States and electricity transmission projects in Chile – "we submit that a period of outperformance for the units may be around the corner," Raymond James analyst Frederic Bastien said in a recent note.
Mr. Bastien has a "strong buy" and $50 target price on the U.S. units (BIP-NYSE), which closed on Tuesday at $42.55 on the New York Stock Exchange. Of the other six analysts who follow the company, there are five "buys" and one "hold," according to Bloomberg. The average 12-month U.S. price target is $47.18.
I have no idea what Brookfield Infrastructure's unit price will do in the short term, but if management continues to execute successfully on its objective to build the asset base with acquisitions and organic investments, I expect that investors will be rewarded with capital gains and steady distribution growth over the long run.
Disclosure: The author also owns BIP.UN personally.