Why Brookfield Infrastructure Partners Is a Better Investment Than Duke Energy

Duke Energy  (NYSE: DUK  )  is one of the best utilities in America. It offers a seasoned management team that knows how to grow -- both organically and through well executed acquisitions. 

But what if I told you there was a utility that was more diversified in both sector and geography? A utility that is small in scale but holds difficult to replicate assets around the world. A utility that, though small in market cap, was managed by a parent company that had $175 billion in assets and over 100 years of experience in managing infrastructure. In other words, a utility that is safer than Duke Energy, yet yields more, has a higher dividend growth rate, and is likely to substantially outperform Duke Energy in the long-term. The purpose of this article is to highlight just how good an investment Duke but also why this other utility is better.

Why Duke Energy is a great company
Duke Energy is one of the most diversified utilities in America. It consists of three divisions: regulated utilities (split into electrical and gas), commercial power, and international power. 

The regulated utility division services $7.2 million electrical customers in six southeast and midwest states while the gas unit has 500,000 customers in northern Kentucky and southwestern Ohio. The electric utility unit has 49.6 gigawatts of electricity generating capacity (40% coal, 36% natural gas/oil, 17% nuclear, 7% hydroelectric).

The commercial energy division consists of midwestern fossil-fuel generating electricity plants (6.6 GW capacity) split evenly between natural gas and coal. The company also operates 1.8 GW of solar and wind generation projects, and it recently announced that it will be selling its fossil fuel plants (for about $2 billion) and focusing exclusively on solar and wind power.

The international energy division has 4.6 GW of power generating capacity, mostly in Latin America (Brazil, Peru, and Chile). Two thirds of this is in the form of hydroelectric capacity. 

There are two primary reasons for investing in Duke Energy: its solid dividend and excellent growth prospects.

Duke's yield of 4.3% is among the most generous in the utility sector and the company has grown it at a 2% CAGR. While this growth rate is just enough to keep up with inflation, dividend growth is likely to increase to 4% to 6% in the future following the successful Progress Energy acquisition. Which brings me to the second good reason for investing in Duke: its growth prospects.

The 2012 acquisition of Progress Energy ended up being a $32 billion transaction (when Progress's debt is included) and made Duke Energy the largest U.S. utility with over $110 billion in assets. Management stated that it was targeting large synergistic cost savings to drive long-term earnings growth of 4%-6%. In 2013, it was able to deliver on these savings, lowering its capital expenditure (capex) spending by $400 million despite a much larger asset base. With long-term growth now supercharged and the payout ratio at 71% (management is targeting 65-70%), investors can expect dividend growth to accelerate to match earnings growth. 

Why Brookfield Infrastructure Partners Is Better
Brookfield Infrastructure Partners  (NYSE: BIP  )  is an LP structured as an MLP (thus it pays distributions to unit holders and sends out a K-1 instead of a 1099 form). It owns $5 billion in world class assets that include:

  • The largest coal exporting terminal in the world, which exports 20% of the world's metallurgical coal. 
  • 9,900 km of electrical distribution lines in North and South America.
  • $2.1 million gas connections in the UK. 
  • 5,100 km of railway in southwest Australia (Brookfield has a monopoly).
  • 28 port terminals in the UK and Europe.
  • 3,200 km of toll roads in Brazil and Chile.
  • 15,500 km of natural gas transmission lines (and 300 Bcf of storage capacity) in North America.

The case for investing in Brookfield consists of three parts.

First, 90% of cash flows are from regulated or contracted sources. Seventy percent are indexed to inflation and 60% are not subject to volume risk. This creates rock-solid cash flow dependability to secure the high yield. 

Speaking of yield, this partnership yields 4.9%, which is higher than almost any other utility. Over the last five years the distribution has grown at 10.2% CAGR and management is guiding for long-term 5%- 9% growth.

The final reason to invest in Brookfield is that the partnership is managed by Brookfield Asset Management. This parent company has $175 billion in assets under management and over 100 years of experience operating real estate, renewable energy, and infrastructure around the globe. 

Bottom line
Duke Energy is a wonderful company and a fantastic long-term investment. However, smaller and lesser known Brookfield Infrastructure Partners is more diversified, offers better growth prospects (due to its smaller size), sports a higher yield, and faster distribution (tax-advantaged dividend) growth rate. Over the long-term Brookfield will likely deliver superior total returns.

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