Why Income Investors Should Meet the Brookfield Family

In today's overheated stock market even traditional dividend stalwarts are being bid up as investors chase yield in the age of near-zero interest rates. Despite the challenges, great income investments can still be found, and this article is designed to focus investors' attention on a family of companies that might otherwise be overlooked. These companies consist of two master limited partnerships and their parent company, which is one of the best asset managers in the world. 

Brookfield Infrastructure Partners  (NYSE: BIP  ) represents one of the most diversified and fastest growing utilities in the world. Its list of high-quality, impossible to replicate assets supports a generous 5% yield that has been growing at 10.4% CAGR over the last seven years. These assets include:

  • 3,400 km of toll roads in Brazil and Chile
  • 98% of power transmission lines in Chile
  • 15,500 km of natural gas pipelines in North America
  • Railroad monopoly in western Australia
  • World's largest coal export terminal
  • 2.1 million gas connections in the UK
  • 28 European Ports
  • 2 container ports in California
Not only has this partnership proven itself a master at accretive acquisitions, but its backlog of identified potential organic investments stands at $5 billion. To put into perspective just how long a growth runway this is, the partnership's total assets stand at $11.1 billion. Thus the organic growth potential alone represents nearly 50% growth in assets (management targets 12%-15% returns on invested capital, ROIC, for each investment).
 
This combination of disciplined acquisition and organic investment generated a strong and growing AFFO (adjusted funds from operations) yield of 13% in 2013. AFFO is what pays the distribution, so this metric is very important as both a measure of efficient management and potential for distribution growth in the future. Since 2009, this metric has increased from 4% to 13%, indicating that management has been able to achieve significant and efficient economies of scale that allow it to grow FFO/unit quickly and consistently (and with it the distribution). 
 
Management is guiding for long-term 10% FFO/unit 
and distribution growth of 5%-9%. With management's history of under promising and over delivering on distribution growth, income investors can likely expect continued market outperformance from this MLP (total returns of 17% CAGR since 2008 compared to market's 7%).
 
One additional benefit of this partnership is that management operates such as to prevent unearned business income (UBTI), making this an MLP safe to own in a tax-deferred account such as an IRA.

Brookfield Renewable Energy Partners  (NYSE: BEP  ) is an MLP specializing in renewable energy generation and distribution. It owns and operates 216 power generating facilities in three countries: the US, Canada, and Brazil. Eighty-four percent of its six GW (gigawatts) of capacity comes from hydroelectric plants with the rest coming from wind and solar. The investment thesis behind this MLP is two-fold: growth in renewable energy and its strong and growing distribution. 

The aging American infrastructure will require replacing (average coal fired power plant is 47 years old), and the regulatory environment is highly favorable to replacing dirty coal with clean hydro and wind energy. In fact, 37 states, nine Canadian provinces, and every EU country have renewable energy standards that require a certain percentage of power to come from renewable sources. 

With the global renewable energy market growing by 100 GW of capacity ($200 billion in assets) annually, Brookfield Renewable Energy's $17 billion in assets leaves a very long growth runway. 

Growth can come in two ways -- accretive acquisitions (purchasing existing dams and wind farms) and organic investments (building new ones). Over the last 10 years, the partnership has increased capacity by 4.2 GW through both strategies. Currently management has 1.7 GW of capacity growth planned (a 25% increase in total capacity), with each investment targeting 15%-20% ROIC. 

The generating capacity is sold under long-term, inflation-linked power purchase agreement (PPA) contracts. Currently 90% of 2014 capacity and 80% of capacity through 2018 is under contract (average contract length is 18 years). Such long-term cash flow predictability supports a 5% yield with management guiding for 3%-5% annual distribution growth (5% since IPO in 2011).

Brookfield Asset Management:  (NYSE: BAM  ) is the parent company and general partner of both Brookfield Infrastructure Partners and Brookfield Renewable Energy Partners. The company has $175 billion in assets under management and over 100 years experience in managing real estate, utilities, infrastructure and private equity. Under its Master Service Agreements with its MLPs it collects an annual management fee of 1.25% of market cap and a maximum IDR (incentive distribution right) of 25% above a certain distribution. 

Analysts are projecting 15.3% EPS growth and 12.6% dividend growth over the next decade. Given the company's 19-year history of market outperformance (16.5% total returns vs market's 6.5%) and recent 33% dividend increase, income investors can expect great things from this company for many years to come.

Foolish takeaway
When it comes to quality management of real, hard-to-replicate assets, few do it better than Brookfield Asset Management and its family of MLPs. With generous, growing, and secure yields, backed by some of the best assets in the world, income investors should consider these companies for their long-term income portfolios. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2014, at 3:16 AM, Acorn17 wrote:

    Hi Adam,

    I have a quick question about UBTI as related to MLPs held in IRAs. I have seen in the BIP investor presentation that they seek to minimize it. I understand that the limit per IRA before incurring taxes is $1,000 total.

    How can you find out what portion of an MLP's distribution is UBTI and what is not? Also, from what you're saying it looks like only a portion of the distribution could be UBTI, not the whole thing. Is that correct?

    Thanks!

  • Report this Comment On May 20, 2014, at 9:01 PM, AdamGalas wrote:

    The K-1 form sent out to unit holders annually breaks down what % of annual distributions is taxable income, Return of capital and UBTI.

  • Report this Comment On May 20, 2014, at 9:02 PM, Acorn17 wrote:

    Thanks Adam!

  • Report this Comment On May 21, 2014, at 5:14 PM, AdamGalas wrote:

    My pleasure, I'm always eager to help my readers:)

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