In a matter of months, the global economy has gone from steady growth to a sharp drop into recession. COVID-19, the illness caused by a novel coronavirus that's rapidly spreading around the world, has put the brakes on the global economy.
Air travel, cruise lines, and hotel bookings have been decimated. Non-essential retailers and businesses have temporarily closed. Restaurants and entertainment venues are closed to patrons, with restaurants in many places only offering delivery or take-out service.
We've already seen the early data to indicate how bad it could get. More than 10 million Americans have filed for unemployment over the past two weeks, by far the largest single-week numbers on record. The U.S. economy lost more than 700,000 jobs in March, the first net-job-loss month in over a decade. It's expected to be far worse in April, even with the federal government set to inject trillions of dollars to prop up the economy and help businesses keep people on their payrolls.
Yet even in the midst of what could be a deep and deeply painful recession, people and businesses will continue to need access to water, energy, communications, and other important infrastructure that the modern world depends on. That's why I've made high-yield infrastructure stocks a major focus of my buying over the past few weeks. Three I have bought recently are Atlantica Yield (AY 0.45%), Brookfield Infrastructure Partners (BIP -2.26%), and Phillips 66 (PSX -2.00%).
A top risk-reward investment
In general, the companies that own and operate these important infrastructure assets should prove fairly safe investments, with characteristics similar to what you'd find from top utilities. That's certainly the case for Brookfield Infrastructure Partners, which owns and operates telecommunications, transportation, water, and energy infrastructure on four continents.
Historically, Brookfield Infrastructure has proven an incredible investment and an excellent source of both a high dividend yield and regular payout growth. Since going public -- coincidentally during the last major global recession -- management has been able to increase the distribution almost every year, and it's up an incredible 814% since.
As a result, investors have enjoyed a remarkable 462% in total returns:
A big reason Brookfield Infrastructure has been able to generate these kinds of returns is because management has proven incredibly capable at capital allocation. The investment strategy is built on discipline and refusing to overpay for acquisitions.
Even with a bounce back from the lows, Brookfield Infrastructure is still down 27% from its all-time high, a great value for a wonderful business. It's also a little more accessible today, in the form of Brookfield Infrastructure Corporation (BIPC -2.53%). This is the same business but trades as a corporation, which has tax benefits for some investors, particularly if you own it in a retirement account.
A small company with big prospects
Atlantica Yield is a tiny company in the multitrillion-dollar world of global infrastructure, but it's partnered with a major utility in Algonquin Power & Utilities, which owns a substantial stake in the company and manages a portfolio of projects that Atlantica Yield has the ability to acquire. Two of Algonquin's founders, including CEO Ian Robertson, serve on Atlantica Yield's board of directors.
Beyond having a heavyweight in its corner, Atlantica Yield also has a strong base of existing operations. It owns 25 different assets across wind and solar energy generation, electricity transmission, natural gas, and water desalination, all of which are under long-term contracts with almost 18 years average life remaining.
Management has also acted to take advantage of historically low interest rates, closing on $320 million in debt on a six-year term with a 1.96% interest rate. This will save the company about $10 million per year in interest expense alone.
Yet the market continues to treat Atlantica Yield like it's in trouble. Shares are down 32% from the 2020 high, pushing the dividend yield above 7% at recent prices. That's why I've already bought and have it on my list to buy even more.
The only oil stock I've bought so far
Oil stocks have been absolutely brutalized this year. Oil prices have cratered under the double-whammy of Saudi Arabia's war for market share and crashing demand as the global economy freezes up.
Global transportation has nearly halted. Air travel is down over 80%, cruise lines have almost fully ceased operations, and more than 90% of the U.S. population is under stay-at-home orders. Some estimates are that oil demand could fall 20 million barrels per day in April and possibly into May. That's close to Russia and Saudi Arabia's 2019 average daily production.
Because that pain is still set to come, I've only made one investment in the oil patch so far: Phillips 66. The company's refining business is likely to take a beating in the next few months as demand for gasoline, diesel, and jet fuel fall, but its midstream business is focused on natural gas, and demand for petrochemicals has remained relatively steady. Most importantly for riding out the downturn, the company doesn't operate any oil production, which is a massive reduction to the downside risk most other integrated oil giants must deal with.
With its lower-risk operations and a strong balance sheet with some $6 billion in liquidity, Phillips 66 is likely to emerge from the oil crash and recession in much better shape than almost any other oil company, and I think it's one of the few that has better-than-even odds to be able to maintain its dividend.
Sure, it's still risky. It could take even longer for the economy to come back online than anticipated, and that could lead to management deciding to cut or lower the dividend to preserve cash. But even with that risk, today's 46% haircut to the share price is likely to still prove a bargain a few years down the road.
Not risk free, but important, necessary businesses across economic cycles
The next few months are likely to prove painful for many industries and millions of people as the depth of the recession becomes more clear. Moreover, there's risk that the economic downturn could last longer than people expect in an effort to hold COVID-19 at bay. Simply put, the government can help soften the blow for individuals and help businesses stay afloat, but it can't replace the entire economy.
There's still risk, even for these companies that own infrastructure we depend on come rain or shine. But within that risk, investors who look past the downturn to an eventual recovery in 2021 will find that today's prices should prove incredible bargains.