image courtesy of Brookfield Infrastructure Partners
Income investors have long loved utility stocks for their predictable cash flows and usually slow growing but highly secure dividends. Now, however, the recent market correction has created an exceptional long-term high-yield opportunity you won't want to miss. So let me share three reasons I believe Brookfield Infrastructure Partners (NYSE: BIP) is by far America's best utility stock and deserving of a spot in your diversified dividend portfolio.
World-class diversification and unsurpassed cash flow stability
I've never seen any utility with such vast geographic and industry diversification as Brookfield Infrastructure Partners. It owns some incredible deep-moat assets all over the world, such as: 10,800 km of electrical transmission lines, 2.4 million electricity and gas connections, and 9,900 km of railroads on four continents -- among many others.
Source: Brookfield Infrastructure Partners investor presentation.
Even better is cash flow stability these assets provide. For example according to the company 90% of its cash flow is either regulated or under long-term contracts, with 70% of it indexed to inflation and 60% having zero exposure to commodity price risk.
Brookfield Infrastructure has even hedged 75% of funds from operations, or FFO -- which is what pays the distribution -- against foreign currency exchange risk for the next 18 to 24 months. Such stable and predictable recurring cash flow makes for a dividend that blows other utilities out of the water.
One of the best dividend profiles out there
Brookfield Infrastructure Partners offers income investors the dividend trifecta of: high-yield, rock-solid payout security, and outstanding future growth potential.
BIP Dividend Yield (TTM) data by YCharts
In fact, not only is the current 5.5% yield the highest it's been in five years, but that distribution represents a FFO payout ratio of only 67%. This is a good sign because it is within management's long-term payout ratio target range of 60% to 70%. Basically, that means that no matter what's going on with the global economy, oil prices, or the stock market, Brookfield Infrastructure's ability to pay your quarterly distribution shouldn't keep you up at night.
Meanwhile, future payout growth promises to be stupendous -- relative to other utilities -- with management guiding for 5% to 9% annual distribution growth supported by long-term 10% annual growth in FFO per unit. Given its $1.3 billion pipeline of projects and management's heavy emphasis on additional infrastructure acquisitions -- the LP only targets infrastructure assets that it thinks can achieve 12%-15% annual returns -- I think those targets appear easily attainable.
BIP Total Return Price data by YCharts
With such a fantastic business model, it's no wonder that Brookfield Infrastructure Partners has been crushing the overall market over the past seven years, a trend that should continue long into the future thanks to one of the finest management teams in the world.
Management with outstanding deal-making ability
Brookfield Infrastructure Partners is a limited partnership with Brookfield Asset Management (BN -2.76%) serving as its sponsor and general partner.
Under its master services agreement Brookfield Asset Management -- which oversees $218 billion of total assets and has over 100 years of experience with utility, infrastructure, and renewable energy asset management -- receives an annual base fee of 1.25% of enterprise value plus 25% of all distributions exceeding $0.33 per unit per quarter.
This creates a symbiotic relationship where Brookfield Asset Management has strong incentives to use its long-standing international relationships in the utility and infrastructure industries to help secure strong growth for Brookfield Infrastructure Partners via amazingly attractive asset acquisition arrangements.
One such example is the recent $6.6 billion deal in which a consortium led by Brookfield Asset Management will acquire Australian port giant Asciano. Brookfield Infrastructure Partners will end up with a 55% stake in over 40 Australian and New Zealand ports as part of its $2.8 billion contribution to the consortium.
Best of all, according to Brookfield Infrastructure CEO Sam Pollock, many more Australian megadeals are in the LP's future because of that nation's desire to help close its budget deficit through privatization: "There will be so many future development opportunities that will come to market, as the economy recovers and the [federal and state] government continues to encourage private investment. ...There will be billions of dollars of capital required in this market."
Such deals should greatly help the LP achieve management's long-term FFO-per-unit and distribution growth goals, which probably means strong total returns for income investors.
Takeaway: Brookfield is truly a stock to buy and hold forever
Of all the companies and partnerships I've studied over the years Brookfield Infrastructure Partners is one of the few I consider a true "Buy and hold forever" stock. Simply put, few other publicly traded utilities can match its superb globe-spanning deep-moat asset base, its mouthwatering yield with plenty of growth left in the tank, and management that is truly second to none.
At today's unit price, Brookfield Infrastructure Partners makes an exceptional value proposition that should serve long-term income investors very well for decades to come.
