Analysts remain bullish on Brookfield Infrastructure Partners. But there’s a catch

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Analysts are upbeat about Brookfield Infrastructure Partners LP, but their optimism is at odds with a unit price that slipped toward five-year lows in Toronto this week, turning a former star into the biggest laggard within the S&P/TSX 60 Index this year.

The units – essentially shares – are down more than 28 per cent in 2023, punctuated by a particularly steep sell-off since mid-September. After years of strong performance, the units are now trailing the blue chip Canadian index by 36 percentage points over the past five years, without including dividends.

Investors (full disclosure: I am one of them) have bet that the company’s globally diversified portfolio of electricity distribution, toll roads, telecom towers and pipelines will generate steady long-term cash flows and underpin rising dividends. That wager is looking increasingly frail.

The good news, if you can call it that, is that Brookfield isn’t alone here. Ever since central banks began to raise their key interest rates last year, dividend-generating stocks have looked less appealing next to bonds.

Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which holds a small position in Brookfield, said in an e-mail that rising rates are responsible for recent setbacks in all sorts of dividend-generating stocks.

“Check out the performance year-to-date of many U.S. REITs, MLPs, pipelines, etc. All crap as rates have risen,” Mr. Schwartz said, referring to dividend-focused real estate investment trusts and master limited partnerships.

To his point, the real estate sector within the Standard & Poor’s 500 Index has declined 13 per cent in 2023, while other rate-sensitive sectors in Canada and the United States, including utilities and telecom stocks, are nursing similar wounds.

Many economists believe that the U.S. Federal Reserve may be close to ending its rate-hiking campaign. However, the bond market is reflecting the view that rates will stay higher for longer. The yield on the 10-year U.S. Treasury bond touched a new multiyear high of five per cent this week, dealing fresh misery to dividend investing strategies.

In the case of Brookfield, its declining unit price has pushed up the dividend yield to 7.1 per cent, as of Thursday. That is the highest yield in well over a decade, and up from a recent low of 3.1 per cent early last year.

There may be additional factors weighing on the unit price besides competition with bonds. Rising interest rates have raised borrowing costs, adding to concerns about the ability of some highly indebted companies to increase their dividends or make big investments in their operations.

More specific to Brookfield, the company issued about 21 million shares in Brookfield Infrastructure Corp. – same entity; different equity structure – to fund the takeover of Triton International Ltd. The issuance dilutes existing shareholders, especially when the share price is falling.

As well, Brookfield-owned Heartland Petrochemical Complex has faced operational delays, weighing on the parent company’s financial performance last quarter and perhaps further weighing on investor sentiment.

Despite these challenges, some analysts have grown more enthusiastic about the investing case as Brookfield’s unit price has fallen, offering hope to rattled investors.

“With the business continuing to perform well, we are of the view investors are being presented with an outstanding buying opportunity here,” Frederic Bastien, an analyst at Raymond James, said in a Oct. 17 note.

Mr. Bastien noted that the units trade at just 7.7 times funds from operations – or FFO, a measure of cash flow – compared with a five-year average of 12.5.

He added that Brookfield enjoys an investment-grade credit rating, with 90 per cent of its debt fixed to terms that average seven years, leaving it less exposed to rising rates than other companies. And it recently had US$2.3-billion in cash available to buy undervalued assets in what the company believes is a “buyer’s market.”

Last week, Patrick Kenny, an analyst at National Bank Financial, upgraded his recommendation on Brookfield to “outperform” – the equivalent of “buy” – from “sector perform.”

He argued that the company’s approach to investing, which involves streamlining operations and cutting costs within a long-lasting infrastructure supercycle, has plenty of runway.

The wrinkle in the bullish case? Even enthusiastic observers are cooling their expectations for a rebound amid stubbornly high bond yields.

Mr. Kenny slashed his target price – or where he expects the units will trade within 12 months – to US$33 from US$38 previously (the units trade in New York and Toronto). Robert Hope, an analyst at Bank of Nova Scotia, cut his target to US$38 from US$44.

Both targets are well above the price of US$21.59 in New York, in midday trading on Friday. Nonetheless, the reduced expectations tap into a concern: Brookfield’s comeback, if it occurs at all, might not take the units back to their glory days for some time.