Recession fears have rocked the stock market over the past couple of weeks because of the impact the COVID-19 outbreak is starting to have on the global economy. No one is quite sure how much effect it will have, which is why stock traders are selling first and asking questions later.
While a full-blown global recession would probably send stocks even lower, the panic-induced sell-off is providing long-term investors with what could turn out to be excellent buying opportunities. One of them is Brookfield Infrastructure Partners (BIP -0.71%), which has declined by about 8% from its peak earlier in the year. It's one of the few companies that could end up thriving if there's a recession, which makes it a great stock to buy during these uncertain times.
Built for a market like this
One reason stocks sell off anytime there's a whiff of a recession is that profits decline during an economic slump. Brookfield Infrastructure, however, is more immune to this impact than most companies because of the types of businesses it operates. Overall, long-term contracts or regulated rates supply about 95% of its cash flow. Meanwhile, 60% of its earnings have no volume risk, because customers pay it even if they don't use their allotted capacity. Brookfield estimates that only about 5% of its annual funds from operations (FFO) is recession-sensitive, leading it to believe that a global recession would have an insignificant impact on its earnings.
Brookfield compliments its largely recession-resistant cash flows with a top-tier financial profile. It has a strong investment-grade credit rating backed by low leverage metrics, which allows it to borrow money at lower rates and easier terms. It also has a conservative dividend payout ratio, which enables it to retain cash to invest in expansion projects. Meanwhile, it proactively sells businesses in strong market conditions so that it has the financial flexibility to pounce on opportunities when they arise. Last year alone it sold $1.5 billion in assets to help fund future acquisitions.
A history of taking advantage of recessions
Because Brookfield Infrastructure maintains a strong credit profile, it's able to take advantage of turbulent market conditions to make needle-moving investments. For example, it gained control of Babcock & Brown Infrastructure during the financial crisis of 2009 and then took it private a year later. It also pounced on several opportunities in Brazil during that country's political and economic crisis in 2016, including buying a natural gas pipeline transmission system from financially troubled oil giant Petrobras.
Those transactions have paid huge dividends over the years, helping Brookfield grow its FFO per unit at a 17% compound annual rate over the last decade. That gave it the power to increase its distribution to investors by a 10% compound annual rate during that timeframe.
Thanks to its asset sales in recent years, Brookfield currently has about $1.9 billion of corporate liquidity to make new investments. It has also been actively working to sell another $1.5 billion of assets to boost its buying power. While it has several acquisitions already in the pipeline, it has plenty of firepower to make new investments if market conditions continue to deteriorate. If Brookfield does capture an opportunity that pops up because of the market turbulence, that deal could provide another meaningful boost to its results as the previous ones did.
A portfolio anchor for times like these
Brookfield Infrastructure is a great stock to own during a recession. For starters, it operates recession-resistant businesses that generate stable cash flow even during turbulent times, which gives it the money to pay an attractive 4.1%-yielding dividend. It also has a top-tier financial profile, which provides it with the financial flexibility to buy when others must sell, enabling it to acquire premium assets at attractive prices. That one-two combo of stable income during a recession and acquisition-fueled upside into a recovery makes Brookfield an excellent stock to buy as market conditions begin to deteriorate.