This article is part of our weeklong series on 11 incredible dividend stocks. You can get the lowdown on this series by clicking here.
Investing in an infrastructure company sounds about as exciting as, well ... as investing in an infrastructure company. Nothing deadens ebullient stock gossip among your friends quicker than a discussion of the safe-haven nature of utilities or the natural hedge provided by timber assets. But for those who recognize the long-term dividend-paying value of such assets, Brookfield Infrastructure Partners L.P. (NYSE: BIP ) is a great way to own some of the world's best hard assets.
Brookfield's hard assets are a model of stability. This publicly traded partnership owns stakes in a variety of infrastructure assets around the world, providing it diversification across business and geography. Assets such as ports, power transmission, timber, coal terminals, and railroads offer a tangible backstop to the company's valuation in bad times and the ability to extract rising rents year after year when times become clearer. That diversity helps set it apart from more focused utilities such as Dominion Resources (NYSE: D ) and Duke Energy (NYSE: DUK ) .
Brookfield's assets provide critical resources that are needed year after year, giving the company stable cash flow. For example, the company distributes electricity to 98% of Chile, and it operates one of the world's largest coal export terminals in Australia. It's one of the largest energy distributors in New Zealand and a large operator of utility connections in the U.K. It operates more than 7% of U.S. natural gas storage capacity. The company also owns stakes in high-quality timberlands in the U.S. and Canada, as well as a series of ports in Europe and even some in China. That's just a brief overview of some of Brookfield's many investments. But the list goes on.
|Company||Brookfield Infrastructure Partners L.P.|
|2-Year Dividend Growth Rate||33.2%|
|Paying a Dividend Without Interruption Since||2008|
Source: Capital IQ, a division of Standard & Poor's. *Funds from operations payout ratio.
Why it's incredible
For those who see the value in owning toll roads, the appeal of Brookfield Infrastructure should be obvious. The company owns stakes in businesses with high barriers to entry and with monopoly or near-monopoly status. For example, the best locations for ports have been discovered and claimed, so a port can offer an almost unassailable competitive advantage. It's the same with the company's power distribution assets and its Australian coal terminal facility, which helps ship out the black stuff to China. Brookfield Infrastructure wants to be wherever there are quality assets with high barriers to entry that will grow in value as the global economy develops.
Such long-lived assets also provide stable cash flow. In fact, in 2010 the company had 77% of its cash flow supported by regulated or contractual sales.
But the company also focuses on growth, snapping up undervalued assets when available. Last year, it pounced on the much larger Prime Infrastructure in a transformative buy. That deal was immediately accretive to earnings, helping the company on its way to achieving its total return goal of 12% to 15% per year.
Such stable growth is exactly what we dividend investors love to see, and it allows the company to target a 3% to 7% annual increase in its distribution and a FFO payout ratio between 60% and 70% -- both reasonable for a limited partnership. Such a payout ratio will provide a solid yield for investors and allow the company to pocket some cash for future investments. In 2010, that payout ratio came to 60%, and that distribution now comes to a portly 5.1%.
Unlike some other companies featured in this series, Brookfield Infrastructure doesn't have a decades-long dividend track record. But every company has to start somewhere; Brookfield Infrastructure began in 2008, when it was spun off from Brookfield Asset Management (NYSE: BAM ) , a company known for its investing acumen. Brookfield Infrastructure has made a good showing thus far, quickly bumping up its payout even during the worst of the recession.
With its stable profile of properties and commitment to annual increases, it's not hard to envision Brookfield Infrastructure joining the lists of esteemed dividend stocks in a few years.
Investors need to be aware of the company's relationship with Brookfield Asset Management. Brookfield Asset owns a 29% interest in the underlying infrastructure partnership, meaning that it can undertake actions that are in its best interest but not those of outside shareholders. Still, Asset has agreed to let Infrastructure in on suitable investments that it sponsors. Given Brookfield Asset's track record of investing success, this concern is not keeping me up at night.
Because Brookfield Infrastructure is a publicly traded partnership, its distributions are reported differently for tax purposes, on a Form K-1. Because of the complexity of partnership taxes, some investors might find the additional paperwork onerous, although tax preparation software often does have instructions for filing.
In the midst of a still-unsettled global economy, there's a lot to like in Brookfield Infrastructure. Hard assets help give your investment firm downside protection, the promise of increased dividends helps buoy the stock, and high barriers to entry provide peace of mind. It all helps make investing in infrastructure a little more exciting.