Many people in retirement hand a portfolio over to a professional money manager, and expect that service to generate income and cash flow for them, at a cost. Retirees have another option: investing in Brookfield Infrastructure Partners (BIP 0.56%), and letting it recycle its capital, increase funds from operations (FFO), and in turn increase its distributions to its investors.
The partnership's strategy is to acquire businesses at a good valuation, and opportunistically sell assets to recycle those funds back into new investments. The company invests in assets including utilities, toll roads, ports and railroads, energy transmission and transport, and data infrastructure. These sectors provide stable cash flow tied to their use, rather than relying on commodity prices.
As of June 3, 2019, the company reported that 95% of its cash flows were regulated or contracted, making them steady and predictable -- exactly what many retirees are also looking for.
Rinse and repeat
In executing its strategy in 2019, the company sold approximately $1.5 billion in mature assets including Chilean toll roads, European ports, and Colombian regulated electricity distribution infrastructure. It reported a 17% internal rate of return (IRR) from these investments. This cycle of selling appreciated assets for further reinvestment, while collecting reliable cash flow during the periods of ownership, is what a retiree on a fixed income looks for.
Those asset sales were redeployed into new, higher-return investments. These included cell towers in India, New Zealand wireless and fiber data networks, North American rail with the acquisition of the Genesee & Wyoming Railroad, and regulated North American gas pipelines. Investing in Brookfield Infrastructure mirrors what a retiree can use a money manager for, but without paying the fees.
Of course, when you choose someone to manage your capital, you want to know it's someone you can trust.
In addition to the gains from recycling capital, company assets experienced organic growth of 9% in 2019, at the top of the 6% to 9% long-term target range. This also allowed for a distribution increase of 7%, within the 5% to 9% objective, marking the 11th consecutive year of distribution increases.
Total liquidity remains strong at $3 billion. It has no significant debt maturities for the next five years, and maintains a good credit rating with interest coverage of 25 times.
Also, investors concerned about complications of investing in partnerships, such as dealing with K-1 tax packages, also now have a way to avoid that. The partnership has established a new, publicly traded company that will soon trade under the symbol BIPC, making access to these professional capital allocators even easier.
A conservative approach
Even in times of economic strength, these asset managers maintain a disciplined and conservative approach. At its September 2019 Investor Day presentation, the company stressed strong liquidity, flexibility, and "unrestricted" cash flows to investors. So while economic concerns during the current pandemic are valid, if a retiree wants to stay invested, Brookfield Infrastructure is a global, diversified, and relatively conservative way to do it.
In fact, if owners of other, less-liquid assets are experiencing financial distress, Brookfield may be able to substitute at prices that lead to even higher returns in the future. Past performance shows it has increased its FFO while maintaining a steady level of debt measured against earnings before interest, taxes, depreciation and amortization (EBITDA).
The continuing and expanding impacts from the coronavirus pandemic are affecting global economies. Retirees seeking income always need to take on various risk levels to obtain different levels of return. Investing in Brookfield Infrastructure Partners and its growing distribution comes with a commensurate level of risk.
In early February, management said it was on track to raise another $1.5 billion, and FFO could be at a level of 12% to 15% growth by the end of the year, supporting the current 5.9% distribution return at the current unit price. The sudden shock related to pandemic impacts may alter expectations. But as the unit price has come down, so has the risk to invested capital, which is why now would be a good time for retirees to apply a portion of their capital for a long-term investment with steady income.