Infrastructure companies may not be the most exciting to cover compared to technology or consumer goods, but that doesn't mean there's not money to be made for investors. Things we use everyday like roads, bridges, electricity, and even cell phones are powered by a slew of infrastructure companies, and many of them are very profitable.
We asked three of our contributors for their favorite infrastructure stocks, and Nucor Corporation (NYSE:NUE), PPL Corporation (NYSE:PPL), and American Tower Corp (NYSE:AMT) made the top of the list. If you're looking for some rock-solid stocks, these names should be on your watch list, too.
Will the steel price stick?
Rich Smith (Nucor): On Motley Fool CAPS, I've stuck with a "buy" rating on Nucor stock since way back in early 2012, and so far, I've been very wrong about that. But call me an incurable optimist -- I still like Nucor stock a lot.
And what's not to like (for a value investor)?
At $16.5 billion in market cap, Nucor stock sells for a measly 6.6 times trailing net income. It's not even that much more expensive when valued on free cash flow -- just 9.2 times. Nucor's 3% dividend yield pays much of that valuation, and is 50% more than what your average S&P 500 stock pays. And analysts polled on S&P Global Market Intelligence see Nucor growing its profit at about 8.5% annually over the next five years, which seems to me more than enough to cover the rest of the stock's valuation.
As for what makes Nucor a stock to watch in July in particular, just last week, Nucor announced that it's raising the price it charges its steel customers by $40 per short ton, which promises to boost profits (if the price hike sticks -- steel companies' last attempt to hike prices...didn't).
Even if a take-it-or-leave it price hike by Nucor doesn't work, though, there's still the potential for President Trump to make progress on his plan to initiate a $1.5 trillion nationwide infrastructure program before his term is out (or in his second term?). Such a plan would naturally increase domestic demand for steel, leading to better sales (and higher prices) for Nucor steel.
At a share price this low, I think this is a bet worth making.
Keeping an eye on coal
John Bromels (PPL Corporation): Probably the biggest trend in energy right now is the crisis in coal. Coal mines in the Powder River Basin of Wyoming -- the biggest coal-producing region in the country -- have been shutting down, and their corporate owners have been declaring bankruptcy. In April, for the first time ever, nuclear power produced more electricity in the U.S. than coal. In the same month, wind, solar, and hydropower combined did the same, also for the first time ever.
Coal's rapid decline is why I'm keeping an eye on power utility PPL Corporation. PPL has operations in coal-heavy Appalachia, including coal-fired power plants in Pennsylvania and Kentucky. It also operates plants in the United Kingdom. But even in the heart of coal country, the company has been transitioning away from coal. It's retired about 900 megawatts of coal capacity in Kentucky and has stated it intends to replace all of its "Kentucky coal-fired generation over time with a mix of renewables and natural gas." In June, it took a symbolic step toward that goal as it demolished its retired Cane Run coal-fired generating facility outside Louisville.
PPL seems to realize that coal's days are numbered and is acting accordingly. In the meantime, the company is paying a current dividend yield of about 5.4%, which has good coverage thanks to the company's strong and stable operating cash flow. A recent earnings miss knocked the share price down a bit, and it's possible coal's woes might (unfairly) hurt the stock, which is why July is a good time to add PPL to your watch list.
This idea is already in your hands
Travis Hoium (American Tower Corp): One category of infrastructure most of us use every day is cellular telecommunications towers, and American Tower Corp is the industry leader in the space. The company owns 410,000 properties in the U.S. where communications equipment can be installed and another 130,000 sites internationally. These are the revenue-generating assets the company uses to make money and ultimately pay a dividend.
In the first quarter of 2019, total revenue grew 4.1% to $1.81 billion, and net income jumped 45.4% to $408 million. Adjusted funds from operations, which is a measure of the cash generated by the business, rose 6.7% to $861 million, or $1.94 per share. American Tower is never going to be a double-digit growth stock, but its steady revenue and funds from operations growth drive its steady dividend increases.
Today, the stock yields 1.8%, which isn't the highest yield on the market, but it's about as steady as dividends get. The wireless industry that underlies American Tower's business continues to grow, and the battle over 5G networks will bring even more demand for tower space.
Despite the fact that millions of people interact with its product everyday, few people realize that American Tower is one of the biggest telecommunications-related companies in the world. Its low-tax REIT structure and solid dividend yield make this an infrastructure stock to own for the long term.
The diverse ways investors can play infrastructure
From steel to electric utilities to telecommunications, there are a lot of ways to invest in the infrastructure industry. These are our top picks today, and given their businesses, they can be steady growth stocks for many years to come.