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Here's My Top Stock to Buy in December

By Jason Hall - Dec 8, 2018 at 5:20PM

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Few investments have this combination of growth, income generation, and resistance to recession. All that and it's down 15% over the past year, making it my top stock to buy right now.

As of this writing on Dec. 6, the S&P 500 is down about 9% from the all-time high hit only a few months ago, and as things stand, there's a very good chance we could see the stock market end the year lower than it started. Frankly, investors are heading into 2019 with more concerns about the bull market that's run for nearly a decade potentially coming to an end. 

And while I continue to remain bullish on stocks over the long term -- it's not even close how far ahead of other investments they have been in terms of wealth creation -- I'm more cognizant now than ever of the importance of dedicating a portion of my portfolio to investments that can ride out recessions, foreign exchange pressures, or other macroeconomic factors, while still generating solid returns. 

And that puts master limited partnership Brookfield Infrastructure Partners LP (BIP -0.48%) at the top of my list. It's easily my top stock to buy in December. 

Stopwatch with the words "time to buy" replacing some of the numbers at the top.

Image source: Getty Images.

What Brookfield Infrastructure does

Focused on five different areas, Brookfield Infrastructure owns and invests in energy, water, data, freight, and passenger transportation assets. In many cases, the assets it owns are irreplaceable in the areas they serve, and the services they provide such as water, wireless telecommunications and data centers, natural gas transmission, and seaborne ports are critical to everyday life and business, no matter the economic environment. 

These assets generate steady cash flows either under long-term contracts or, in many cases, as local monopolies. They're also the kinds of things that cost massive amounts of money to build, and are very hard to replicate.

These barriers to entry give Brookfield a huge competitive advantage, while the nature of the assets themselves produce steady and very generous cash flows. In its management's hands, those cash flows have steadily been put to good work growing a much bigger, more profitable business over time. 

Here's why it's down 15% this year

Brookfield Infrastructure had a year of transition in 2018. Over the past year, the partnership has made some major moves with its portfolio, selling off Transelec for $1.3 billion in March and a handful of other assets since, but has been slower to redeploy that capital. 

This, along with other asset sales over the past three years, has taken a temporary bite out of cash flows. Third-quarter funds from operations -- FFO for short -- per share were down 12.3% from last year. 

Furthermore, rising interest rates are also having an impact on high-yield investments like Brookfield Infrastructure. With 10-year Treasury notes now yielding nearly 3% and likely to trend even higher as the Fed raises interest rates further, yield-hungry investors who moved into stocks over the past decade have started to shift some assets back into the perceived "safety" of bonds. 

Why Brookfield Infrastructure should be at the top of investors' buy lists now

The decline in funds from operations due to Brookfield Infrastructure's asset sales is about to reverse. For instance, Transelec was generating a 7% funds-from-operations yield, while the assets Brookfield is acquiring with the proceeds will yield 11%. Once those acquisitions are closed, they will immediately deliver 57% higher cash flows.

Even better, Transelec was on track to grow 2% to 3% per year, while the data center business and energy infrastructure businesses Brookfield bought with the proceeds are expected to generate 5% to 7% organic annual growth. 

This kind of move is an excellent microcosm of Brookfield Infrastructure over its history: Management is constantly looking to capture premium value for its most mature, low-growth assets, and then redeploy that capital into higher-return, higher-growth businesses. 

Here's how that's worked out over time: 

BIP Chart

BIP data by YCharts.

Since going public about a decade ago, Brookfield Infrastructure has absolutely crushed the market in both total returns and stock price appreciation. Its ability to grow cash flows per unit and deliver dividend growth is a major part of why that's happened. 

But it hasn't happened with just steady up-and-to-the-right growth in FFO. There have been plenty of times when cash flows have reversed for a few quarters:

BIP FFO Per Share (TTM) Chart

BIP FFO Per Share (TTM) data by YCharts.

Management's rigorous focus on owning assets that deliver the best long-term returns -- often by rotating capital from one asset to another -- is the reason why it has been lumpy, but historically moved much higher over time. Ironically, that's also why the stock price has fallen over the past year, as Mr. Market gets caught up in the short-term decline. 

Time to load up at this sneaky-cheap price

Brookfield Infrastructure is on track to deliver $3 per unit in funds from operations this year, so it sells for 12.8 times expected FFO. That's decent value, but not super cheap. But if we look at its pro forma run rate for 2019 FFO of $3.60 based on its recent acquisitions, it trades for 10.7 times (or less) its likely 2019 FFO. 

And that's a bargain for this incredibly high-quality, recession-resistant dividend growth dynamo. At recent prices it yields 4.9%, and it's reasonable to expect management continuing its track record of nearly double-digit annual payout growth. 

It gets even better: Not only is Brookfield Infrastructure built to continue its payout across every economic environment, but it's also a sneaky-good growth stock.

The global urban middle class is going to grow by 1 billion over the next decade and change, and Brookfield already operates critical assets that must get bigger in some of the fastest-growing urban markets in the world. While the market is caught up in short-term concerns, long-term investors should seize this opportunity to load up on one of the next decade's best stocks for dividends and growth. 

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Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
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