Brookfield Infrastructure Partners (NYSE:BIP) recently finished up a fantastic year, delivering 14% earnings growth thanks in part to a needle-moving acquisition. However, it has some headwinds to overcome to maintain that momentum this year. That was evident from comments by CEO Sam Pollock on Brookfield's most recent conference call. Here are three things he wanted investors to know about what lies ahead for the company.
1. The M&A markets are frothy, but we're still finding deals
Last year, Brookfield Infrastructure Partners completed $1.7 billion of acquisitions, led by its $1.3 billion purchase of a stake in a natural gas pipeline system in Brazil. However, its M&A pipeline looks a little bare at the moment. That's because "global M&A activity remains frothy," according to Pollock, which is why the company has "been disciplined and focused on situations where we can leverage our competitive advantages to invest for value."
But while the pipeline isn't as full as it was a year ago, it's not empty, either. In November, the company and its partners signed an agreement to acquire a controlling stake in the second-largest natural gas distribution system in Colombia. The partnership is buying the company in stages, and Brookfield could invest up to $170 million if the group acquires full ownership of the business.
2. Organic growth will be a much more meaningful driver going forward
Acquisitions have been the primary fuel driving growth over the company's history. In fact, Pollock pointed out that "over the past five years, roughly 80% of the equity for growth initiatives went into acquisitions, while approximately 20% went to organic growth projects." However, he said that "in the next 24 months, we estimate deploying approximately $1 billion of equity into organic growth initiatives, which on an annualized basis is more than double the levels we invested at less than five years ago."
He further noted that "our goal over the next several years is to generate 30% to 40% of our investment activity through organic projects, which typically generates the strongest risk-adjusted returns to our business." In other words, while M&A will remain important, organic growth should help move the needle more in the future, which would help smooth out results since acquisitions tend to be lumpy.
3. It might take time to put our war chest to use
Brookfield's acquisition-driven growth has enabled the company to increase its high-yielding payout by an 11% compound annual growth rate over the past decade. However, despite growing earnings 14% last year, Brookfield just boosted its distribution 8% for 2018. That's partially because its M&A pipeline has less visibility than usual and it recently signed a deal to sell its Transelec business for $1.3 billion. That sale will act as a headwind until Brookfield redeploys those proceeds, which is why it chose to be conservative with distribution growth this year.
That said, Pollock stated on the call that "to the extent that we are very successful in deploying capital," the company could make another midyear adjustment to the distribution since "we've done that in the past." Furthermore, he gave every indication that the company does have other deals in the works, noting that M&A activity is "very high" and as "strong as it's ever been." He said that it's casting a wide net for deals, including the telecom sector in the U.S., Europe, and Asia, building out its toll road business in India, and looking at ports in the U.S. as well as general infrastructure opportunities in the country. While competition for these assets remains high, and the company plans to stay disciplined, Pollock believes that "there may be some good opportunities ahead of us if we're patient."
Brookfield was coming off a banner year when a needle-moving acquisition powered double-digit earnings growth. However, with just one small deal in hand for 2018, it might not grow as quickly this year. As a result, investors need to keep their calm while the company invests more money into organic growth projects and finds the right acquisitions. That approach should eventually pay off and could power faster distribution growth in the coming years.