With a distribution yield of 5.3%, Brookfield Infrastructure Partners (BIP -3.88%) has held up well in the face of COVID-19. While units fell as much as 50% from their early-year peak at one point, they are now off by only around 20%. The actual underlying business, meanwhile, hasn't skipped a beat. In fact, management seems to think opportunities for growth are on the horizon.
A long history of returns
Brookfield Infrastructure Partners is a master limited partnership controlled by Canadian infrastructure specialist Brookfield Asset Management (BAM -4.30%). The company has over 100 years of experience investing in physical assets around the world. In addition to that expertise, highly supportive parent Brookfield Asset Management provides Brookfield Infrastructure Partners access to funding to get deals done that might otherwise be out of reach. This isn't the only partnership that Brookfield Asset Management oversees, but all-in the relationship has been a net benefit to unitholders.
The portfolio of assets Brookfield Infrastructure Partners owns, meanwhile, is a bit unique. Many entities in the infrastructure space focus on just one sector. Not this one -- it owns utilities, toll roads, railroads, ports, midstream assets like pipelines, and data infrastructure. That's an incredibly diverse list that encompasses not only many asset categories, but also assets across the globe. Brookfield Infrastructure Partners has portfolio assets in North America, South America, Asia, and Europe. It is a one-stop-shop for investors seeking a broadly diversified portfolio of vital physical assets.
It's also highly focused on generating "sustainable and growing distributions." In fact, that quote is pulled from the partnership's mission statement. So far it's done an excellent job of it, too. The distribution has been increased for 13 consecutive years at a compound annual rate of roughly 10% over the past decade. The first-quarter 2020 distribution was about 7% higher than the one paid in the same period a year ago, with a payout ratio around 80%. That may seem high, but the types of assets Brookfield Infrastructure Partners owns tend to hold up well in good times and bad because they are necessities, not options. So it can afford to pay out a good deal of its cash to unitholders.
For example, despite the effort to slow the spread of COVID-19 by, effectively, shutting down economies around the world, Brookfield Infrastructure Partners' funds from operations (FFO) dropped by only 3% in the first quarter. To be fair, it usually doesn't grow by huge amounts either, but the assets it owns are generally consistent performers. The partnership grows in three ways: expansion of the businesses it runs along with the economy/demand, investment in what it owns to improve performance or increase scale, and management of its portfolio (both buying and selling assets).
The opportunities and risks ahead
That last point is one that investors need to understand -- Brookfield Infrastructure Partners is an opportunistic investor that buys and sells assets over time. For example, in the first quarter it sold regulated distribution assets in Colombia for $100 million and a toll road operation in Chile for $170 million. Meanwhile, it is currently buying as many as 130,000 cell towers in India for an expected cost of around $500 million. This is not a static portfolio.
Sam Pollock, Brookfield Infrastructure Partners CEO, went so far as to note in the partnership's first-quarter earnings release that, "As the economic recovery unfolds over the coming quarters, we remain confident that our highly diversified business is well-positioned both financially and operationally. This will give us the opportunity to take advantage of market conditions to acquire high-quality assets for deep value, as we have in the past during periods of dislocation." In other words, the partnership is looking for deals. That's typical Brookfield Asset Management, which has a long history of taking an opportunistic approach to investing. However, watching an investment you own put money to work when everyone else is fearful can be difficult.
That's doubly true here, because Brookfield Infrastructure Partners isn't shy about using leverage. To give some scale here, Brookfield Infrastructure Partners' financial debt to equity ratio is roughly 0.83 times. NextEra Energy, one of the largest U.S. utilities, comes in at 0.39 times. And Magellan Midstream Partners, a conservatively managed midstream partnership, has a financial debt to equity ratio of 0.57 times. The same trends hold for debt to EBITDA, with Brookfield Infrastructure Partners at 5.7 times, NextEra at 4 times, and Magellan at roughly 3 times. It's not that Brookfield Infrastructure is excessively leveraged per se, but it isn't afraid to use debt. And investing in a countercyclical manner can mean adding more debt when investors and markets are most worried about the future.
A good option For the right person
It would probably be best to look at Brookfield Infrastructure Partners as an acquired taste. So far it has proven its globally diversified business is well run and well positioned. However, it isn't a boring operation that you can expect to be doing the same thing year after year (like, say, an electric utility). It is a managed portfolio, and debt is employed to leverage investor returns. If you can stomach the investment premise here, however, Brookfield Infrastructure Partners and its over-5% yield is well worth a deep dive.