Most people take infrastructure for granted, unless it isn't working right. When's the last time you considered the quality of a road unless you hit a pothole or uneven pavement? When do you think about your cell service unless you experience a dropped call?
Most people also don't think a lot about investing in infrastructure -- the boring utility, transportation, and communication networks that keep today's world running. It's easy to ignore the sector in favor of flashy tech or consumer goods stocks.
But investing in infrastructure can pay big dividends, literally and figuratively. Three such companies to keep on your radar screen in November include Brookfield Infrastructure Partners (BIP 2.82%), Tellurian (TELL 0.44%), and NextEra Energy (NEE 0.34%).
Top infrastructure companies can outperform the stock market. Image source: Getty Images.
A fast grower that's no bargain
Infrastructure stocks can best be evaluated by their collection of assets. An infrastructure company that exclusively owns wind and solar farms is going to encounter very different challenges and opportunities from one that focuses only on toll roads.
Brookfield Infrastructure Partners, one of a family of master limited partnerships (MLPs) controlled by the able team at Brookfield Asset Management (BN -1.10%), doesn't focus on just one area. Instead, Brookfield Infrastructure Partners has been snapping up a diverse collection of assets across the globe, from Brazilian railroads to French telecom towers. It's been buying so much infrastructure, in fact, that its enterprise value has more than tripled over the past year!
The flip side of this rapid growth is that the company has had to take on quite a bit of debt to fund those purchases, and its share price has gone way up while its payout yield has gone way down, from above 5% a year ago to under 4% today. Brookfield's enterprise value to EBITDA ratio -- a good metric when evaluating infrastructure companies because it strips out depreciation -- is 13.4, which is on the higher end of its recent historical range.
The company still looks to have excellent long-term prospects, and Brookfield is shifting its business model to avoid taking on more debt and to replace underperforming assets with new ones. It's definitely one to keep on your watch list in case the value proposition improves.
An up-and-comer with a plan
While Brookfield divides its focus among at least a half-dozen infrastructure sectors, Tellurian is focused on only one: liquefied natural gas (LNG). The natural gas boom in the U.S. is expected to lead to a booming export market, and for most exportation, natural gas needs to be liquefied to decrease its volume and make it easier to handle.
Tellurian's management believes that the U.S. will be the world's largest exporter of LNG within four years, and it hopes to cash in by constructing a major LNG infrastructure project called Driftwood. It will consist of a pipeline, liquefaction facility, and export terminal, along with production assets. When it's finally completed and begins operations, which the company estimates will occur in 2023, shareholders who bought in early could see a substantial payday (that is, if everything goes according to plan).
In September, that plan took a big step toward fruition when Tellurian announced a $7.5 billion deal with India's Petronet to purchase up to 5 million metric tons of Driftwood LNG annually. That comes on top of another deal with French oil major Total. Tellurian will need to secure even more deals to make Driftwood financially viable, but investment tends to beget more investment.
Things have been quiet since the Petronet deal, and the company's share price has responded by sinking back below $8. Tellurian -- which hasn't yet made an official final investment decision on the project -- is still a very speculative stock, but it's worth keeping an eye on to see if it can successfully woo additional backers for the Driftwood project.
A victim of its own success
Brookfield is highly diversified, while Tellurian has a single focus. Our last company, NextEra Energy, is in between: It's focused on energy, but splits that focus between serving as an electric utility in Florida and the largest generator of solar and wind power in the world.
NextEra is the largest company on this list by far. Brookfield has a market cap of $15.1 billion, while Tellurian is valued at just $1.9 billion. NextEra is a $112.4 billion energy juggernaut. And it is likely to continue growing. Management expects earnings growth of 6% to 8% over the next few years. That may not sound like high growth, but for a utility, it's actually quite strong. NextEra's dividend is increasing as well, with the company anticipating 12% to 15% dividend growth each year through 2022.
With those strong prospects, it's no surprise that NextEra's valuation has soared. Both its enterprise value to EBITDA ratio and its more standard P/E ratio are at 10-year highs. Even a small price drop in early November hasn't done much to change the situation. That's why I'm not necessarily recommending buying into NextEra now, but its strong growth story and excellent prospects make it a must for an infrastructure investor's watch list.
Put infrastructure stocks on your radar
Master investor Peter Lynch liked stocks that were -- in his description -- "boring." And many infrastructure stocks are just that. But a boring stock that consistently turns in solid performance can still have a place in top portfolios, if the price is right. Brookfield Infrastructure Partners, Tellurian, and NextEra Energy are three stocks to keep an eye on this month.
