Why You Should Avoid This Utility, and 2 Superior Alternatives

Regulated utilities are traditionally viewed as a safe, high-yielding income source. This article explains why one particular utility, though safe, is inferior in income and total return potential to two lesser-known utilities.

Jun 30, 2014 at 1:57PM

Today's yield-starved investors might be tempted to look at regulated utilities such as Consolidated Edison (NYSE:ED) as a source of safe, steady dividend income, and indeed, the New York City utility giant -- serving 3.3 million electricity customers and 1.1 million gas customers -- is certainly all of that.

This article is not meant to argue that investors in Consolidated Edison are likely to lose money with this investment (its 21-year total return of 9.8% has matched the markets), but that there are alternative investments, equally safe but with higher yields, faster dividend growth rates, and superior growth potential.

Consolidated Edison: underwhelming growth potential
For the first time in 60 years, New York City's population is growing and creating strong job growth (200% of jobs lost in 2009 recovered, second only to Houston).

In addition, New York City is in the process of transitioning from heating oil to natural gas, with over 2 million people making the switch since 2010.

These two trends should mean strong earnings growth for an electricity and gas utility like Consolidated Edison. However, management is projecting only 1.9% annual growth in electricity demand for the next five years, and 3.8% growth in gas demand. With $8.5 billion in capital costs scheduled over the next three years, this forecasted growth is expected to result in a 10-year earnings growth rate of 2.4%.

Analysts are projecting Consolidated Edison's 10-year dividend growth rate will be 1.94%, in line with its historical 1.89% (over the last 21 years).

Superior alternatives from infrastructure

CompanyYield10-Year Projected Divided Growth Rate10-Year Projeced Annual Total Return
Consolidated Edison 4.40% 1.92% 6.60%
Brookfield Infrastructure Partners 4.70% 6.86% 12.10%
CorEnergy Infrastructure Trust 6.90% 3.71% 11.34%

Brookfield Infrastructure Partners (NYSE:BIP) and CorEnergy Infrastructure Trust (NYSE:CORR) are two superior ways for long-term income investors to earn safe, growing income, plus superior capital gains to boot.

Brookfield Infrastructure Partners is one of the best ways to play global infrastructure, representing one of the best-managed and most diversified portfolios of assets on earth.

  • 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 U.K.
  • 30 global ports
  • 2 container ports in California

In the first quarter, Brookfield added $250 million to its already large $5 billion project backlog as well as closed on five investments. These include closing on the California container terminals, acquiring container terminals in New York and South America, and acquiring district power systems (steam for heat) in Chicago and Seattle.

Of Brookfield Infrastructure's cash flow, 90% is either regulated or on very long contracts, with 70% indexed to inflation and 60% with no volume risk (recession protection).

Under the excellent guidance of Brookfield Asset Management ($175 billion under management and 100-year history of managing real estate, infrastructure, and utility assets),Brookfield Infrastructure Partners just announced adjusted funds from operation (AFFO)/unit (which pays the distribution) growth of 11% over 2013.

With $2.6 billion in liquidity, an enormous project backlog, and management successfully achieving its goal of 12%-15% returns on its investments, Brookfield Infrastructure Partners is well on its way to achieving its distribution growth guidance of 5%-9%.

CorEnergy Infrastructure Partners is a new energy infrastructure REIT and great way to play the coming $780 billion energy infrastructure boom. Its principle managing director, David Schulte, is the legendary founder of Tortoise Capital Advisors, a $17 billion energy infrastructure investment company whose primary fund has returned 13.2% annual total returns over the last 11 years compared to the market's 7.2%.

CorEnergy operates by purchasing high-quality energy infrastructure assets at good prices (management targets 8%-10% rates of return) and then rents them back to the party from which they purchased the asset, under a long-term and inflation indexed triple-net lease.

Triple-net leases are leases in which the lessee pays all maintenance and operation costs. This benefits CorEnergy because it avoids expensive maintenance and capital expenditures while generating secure, growing, and inflation-protected cash flows. The energy company leasing the infrastructure benefits because it receives cash upfront with which to grow its business while still maintaining operational control.

CorEnergy currently owns these infrastructure assets:

  • Liquid gathering systems in Pinedale, Wyoming gas field leased to Ultra Petroleum under a 15-year lease.
  • 40% stake in Eastern Interconnect Electrical Transmission Line in New Mexico.
  • 1.5 million barrel oil storage terminal in Portland, Oregon under a 15-year lease.
  • 10 year $11 million loan at 12% for fracking water storage facility in Wyoming.
  • Omega gas pipeline serving Fort Leonard Wood Missouri.
  • 6.7% stake in LNG storage facility in Mississippi and a 11.1% stake in four sand and gravel mines in Tennessee.

Foolish takeaway
Consolidated Edison is a safe but underwhelming utility likely to deliver subpar total returns over the long term because of its sub-2% dividend growth. Brookfield Infrastructure Partners and CorEnergy Infrastructure Trust offer superior yield, dividend/distribution growth, and capital gains opportunities. Brookfield Infrastructure's asset base offers far more diversification than Consolidated Edison's. While still small, CorEnergy is poised to grow quickly through superior management and immense opportunity stemming from America's coming energy infrastructure boom.

Top dividend stocks for the next decade
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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool owns shares of CorEnergy Infrastructure Trust. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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