Brookfield Infrastructure Partners (BIP 1.10%) and Emera (EMRAF 3.34%) both own vital infrastructure assets. Each has a goal of providing investors with a growing stream of dividends. In fact, in many ways, they are very similar entities. So Emera's 5.5% yield, notably higher than Brookfield Infrastructure's 4.7%, might lead investors to deem it the better buy. Here's one key factor you need to consider before you make that choice.
Slowing the pace
Emera's business is built around the energy industry. Its biggest asset is recently acquired Tampa Electric Power, which makes up about 40% of the company's earnings. However, it has a total of nine major assets spanning the energy space, from electricity and natural gas utilities to power transmission and renewable power. Roughly 90% of revenue is regulated. The majority of its revenue comes from the United States, which isn't surprising given the size of Tampa Electric, but it also has exposure to its home country of Canada and to the Caribbean.
One of Emera's goals right now is to shift, along with the energy industry, from dirty coal to cleaner and renewable sources of energy. For example, the company's Maritime Link and Labrador-Island Link transmission line investments are both meant to move clean hydropower energy from where it is created to locations that are currently relying on coal. Emera also has notable plans to expand its solar footprint.
All in, Emera expects to spend around 6 billion Canadian dollars between 2018 and 2020 on growth. Strategic asset sales will help the company self-fund at least a portion of this investment. It believes that, based on its spending, regulators will approve rate hikes and that, in turn, will support dividend growth of between 4% and 5% through 2021. This rate, however, is down from roughly 10% between 2013 and 2018.
The slowdown in dividend growth shouldn't be too big a surprise given that Emera is basically a regulated utility business. This isn't a bad thing, as it suggests that growth will be slow but steady in the future. However, this downshift highlights a key difference between Emera and Brookfield Infrastructure Partners.
A broader scope supports higher dividend growth
Brookfield Infrastructure also has a material energy business. For example, utilities make up around 47% of the partnership's adjusted EBITDA. Transmission, which includes pipelines and high voltage power lines, chips in another 18%. But it also has exposure to things like toll roads and ports, and is building a business around data centers, which together account for the rest of adjusted EBITDA. These investments, meanwhile, are spread across the world, with exposure to North America, South America, Europe, Asia, and Australia.
Brookfield Infrastructure is a much more diversified business than Emera. That's not a small difference because it means that Brookfield has more levers to pull to support its growth. This shows up in the company's long-term goals.
The partnership has a stated objective of reinvesting in its business, with roughly 65% of funds from operations earmarked for investor distributions, 20% for maintaining its assets, and 15% for growth spending. Like Emera, it also recycles capital, using the proceeds from asset sales to invest in new businesses. All of this is in pursuit of distribution growth between 5% and 9% a year, on average, over the long term. With a broader investment approach, and a history of actually exceeding that target, there's no reason to doubt that Brookfield Infrastructure can provide investors with more robust dividend growth than Emera.
Sometimes a lower yield is the better option
Although the core of the two businesses is very similar, with utility assets providing the bulk of each company's revenue, Brookfield Infrastructure's more diversified portfolio gives it a notable leg up on Emera. That's largely driven by the fact that Brookfield Infrastructure has more opportunities to put money to work on behalf of its investors (industry-wise and geographically). That's worth a slightly lower yield, especially when you look at the impact this difference has on each company's dividend growth targets. Emera isn't a bad company, but Brookfield Infrastructure looks like a better long-term income option.