Brookfield Infrastructure Partners (NYSE:BIP) is offering a generous 5% distribution yield backed by over a decade of annual dividend increases. Investors looking for a diversified infrastructure investment would do well to take a look. But COVID-19 has changed the broader market and global economy, so the next year or so could look a little different at Brookfield Infrastructure. That's not a bad thing at all, just a sign of a resilient and thoughtful management approach.
What the partnership really does
The easy way to describe Brookfield Infrastructure's business is that it owns a broadly diversified collection of infrastructure assets. For example, the master limited partnership's portfolio includes utilities (electricity generation and transmission), transportation (toll roads, ports, and rail lines), energy (midstream pipelines), and, more recently, data infrastructure (data storage and transmission). These are expensive physical assets that are expected to generate consistent cash flows over long lifetimes. Moreover, they are spread across the globe, with the partnership owning assets in North America, South America, Europe, and Asia. It is a one-stop shop for investors seeking out a diversified infrastructure investment.
But that's not a full description of Brookfield Infrastructure Partners' business -- it's just one piece of the puzzle. That's because it is an active manager of the portfolio it owns. This obviously means that it regularly maintains and upgrades the assets in which it invests. That's just table stakes, however, for any company that owns infrastructure assets. If you don't maintain what you own and expand along with demand, the business will suffer.
The key to understanding Brookfield Infrastructure Partners is that it also buys and sells assets on a fairly regular basis. This sets it apart from most other infrastructure options. For example, The Southern Company (NYSE:SO), one of the largest utilities in the United States, has sold some assets over the past couple of years. The sales made sense given that they weren't core to its market or business. However, the reason for the sales was that it needed cash to shore up its balance sheet so it could keep building a pair of nuclear power plants. In other words, the sales were made out of necessity.
Brookfield Infrastructure buys and sells assets more like an investment manager, trying to get the best price on both sides. If it sees a good value proposition in the market it steps in to buy it. If it can get a good price for something it owns, it is willing to sell. You aren't buying a static portfolio here -- it will ebb and flow over time, while sticking close to its core infrastructure mandate.
The next year or so
With that as a very important backdrop, you can step back and consider the future. Over the long-term, the easy answer is that you'll see more of the same, namely a solid portfolio of infrastructure assets that shifts over time. However, COVID-19 has upended the global economy, and the efforts to contain its spread are likely to push the world into a recession.
The first notable impact on Brookfield Infrastructure is that some of its more economically sensitive businesses aren't doing so well. That includes things like toll roads, which saw a material decline in traffic as people were asked to stay inside and businesses shut down. That's just one piece of a broader portfolio, and it won't derail the partnership -- funds from operations (FFO) were down modestly year over year (about 2.5%) in the first quarter. Other businesses, like utilities, have held up well. Once again, however, these are just the surface impacts that you'd expect to see.
The second major impact here is that Brookfield Infrastructure has pulled back on its plans to sell assets. In fact, management specifically stated in its first-quarter update that it had "paused asset monetization initiatives." Why? Basically, it doesn't think it can get a good price for the assets it wants to sell, so it isn't going to sell them. That makes sense, but means that it won't have the cash such sales would generate to invest in new assets.
The third material impact is that Brookfield Infrastructure is still ready to do some deals, but only if they are at the right price. For example, management noted that it was investing in the capital markets pretty aggressively when the market sold off in March (the partnership doesn't always buy entire infrastructure businesses outright), but has since pulled back because prices have increased in some areas. It is now hitting the pause button while it waits for an opportunity at the right price. In its most recent quarterly commentary, management notes that it found a big deal during the last recession only after it had been under way for some time. In other words, a sizable acquisition could be in the cards over the next 12 months or so.
The upshot of all of this is that, over the next year, the core business should continue to chug along, with some puts and takes in the various businesses. Don't expect Brookfield Infrastructure to sell anything major, as it is willing to wait for better pricing. (Importantly here, it also has the financial ability to wait.) And, lastly, don't be shocked if there's a big deal inked as market conditions force others to sell assets on the cheap. However, that deal will likely be financed largely with debt. Not a terrible thing, and until Brookfield Infrastructure believes asset sales make economic sense, it's just how it will do things.
Slow, steady, and value-oriented
Brookfield Infrastructure Partners isn't likely to excite you much over time. However, you have to understand its approach to owning and investing in infrastructure to fully appreciate the way it manages its business. Things are more up in the air today than they have been in many years for the partnership and the world. That's not going to change the approach here, but it will impact how things unfold over the next year or so. All in all, Brookfield Infrastructure is still an attractive way to invest in infrastructure -- just make sure you know what you are buying.