When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at the publicly traded partnership Brookfield Infrastructure Partners, L.P. (NYSE: BIP ) today, and see why you might want to buy it, sell it, or hold it.
The company's business is a good place to start, as it's rather appealing. Whereas lots of companies' value is tied up in intangibles, Brookfield owns many hard assets, such as ports, power transmission plants, timber, coal terminals, and railroads. It distributes electricity to 98% of Chile, operates one of the world's largest coal export terminals in Australia, is a top energy distributor in New Zealand, is a major utility connector in the U.K., owns sizable timber stakes in North America, owns ports in Europe, and does much more.
That kind of diversity lends more stability to the company. If coal suddenly falls out of favor, the company has other revenue streams to depend on. Investors in Empire District Electric (NYSE: EDE ) learned about the dangers of under-diversification when a Missouri tornado damaged the company so badly that its dividend was at least temporarily halted.
Its assets carry significant competitive advantages, too. Most are hard to duplicate, keeping new would-be rivals away. It's not a simple thing to create a new railroad. It's the same with ports -- prime port locations are pretty much full of established ports.
And then there's defensiveness. Brookfield's holdings are not too cyclical, meaning that they aren't likely to prosper or suffer based solely on how the overall economy is doing. Even in a recession, energy will remain in demand, port terminals will keep operating, and railroads will run. Many of its businesses enjoy long-term contractual arrangements, providing dependable income.
It is somewhat tied to the economy, though, and that can provide a boost in recovering environments. When the global economy improves, for example, construction is likely to heat up, demanding more of the lumber that Brookfield can provide. Railroads will likely see their volume increase, as well.
The company is adding to its mix over time, too, when it sees attractive opportunities. It recently snapped up some toll roads in Chile, for example.
Another factor that draws many investors to Brookfield is its dividend. The stock was recently yielding 4.9%, far exceeding what you can collect from your bank or many bonds.
Growth is another draw. Check out Brookfield's revenue:
2008: $16.8 million
2009: $290 million
2010: $634 million
Past year: $1.5 billion
Don't like too much volatility? Brookfield's beta, measuring its volatility relative to the overall market, is 0.62, meaning it's more stable. Want to add international holdings to your portfolio? Based in Bermuda, Brookfield has operations around the globe. A disaster in any one region isn't likely to cripple it.
Despite all the upsides, there are some downsides to Brookfield. For one thing, as a publicly traded partnership, it doesn't have the same tax treatment as a common stock company. Come tax time, shareholders will likely have to deal with K-1 forms, which can add some complexity to tax returns. Tax-prep software or a tax professional can make relatively easy work of it, though.
Next, know that in 2008, the company was spun off from Brookfield Asset Management (NYSE: BAM ) , which holds a 29% stake in it. Thus, the two companies' fortunes are linked to some degree, though the asset management firm has such a solid investment record that it's not much of a red flag. Indeed, my colleague Jim Royal named Brookfield Asset Management as one of the best stocks to hold forever.
Finally, despite the company's operational and geographic diversification, it does exhibit some concentration, specifically in and around Australia. In its last fiscal year, it generated 43% of its earnings before interest, taxes, depreciation, and amortization from its Australian coal terminal, and another 13% from energy distribution in Australasia. If you don't like that kind of concentration or have worries about Australia's economy, factor this into your deliberations.
Why would you hold off on investing in Brookfield? Well, if you're not convinced it's one of your best ideas, don't put money in it. Why invest in a 78th-best idea when you could simply add to your investments in your top 10 or 20?
If you're looking for solid dividends in the energy arena but don't need the diversification of Brookfield, consider National Grid (NYSE: NGG ) or SandRidge Energy (NYSE: SD ) . National Grid is an energy giant in the U.K. and a chunk of the U.S., and with its U.K. consumer rates tied to the inflation rate there, it's a good hedge against inflation. Oil and gas company SandRidge has bulls excited about its prospects in the Mississippi Lime field.
To me, Brookfield Infrastructure Partners looks very appealing. I'm not an investor in it yet, but I might become one in the year ahead. Do your own calculations and see if the company makes sense for your portfolio. In the meantime, I'm giving Brookfield a green thumb on My CAPS page.
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