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Better Buy: Brookfield Infrastructure Partners vs. NextEra Energy

By John Bromels - Aug 24, 2020 at 6:00AM

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Two of my top picks go head to head.

Over the past few months, the two stocks I've probably recommended more than any others are Canadian infrastructure asset manager Brookfield Infrastructure (BIP 0.41%) and electric utility/renewable energy generator NextEra Energy (NEE -0.52%). Both have a long track record of increasing share prices and rising dividend payouts. I don't think you can go wrong with either.

But if you had to pick just one of these great investments, which should you choose? Let's take a closer look at both companies and see which one looks like the better buy.

A man's hands on either side of a balance scale weighing stacks of coins.

Image source: Getty Images.

The case for Brookfield

Brookfield owns and operates a diversified group of infrastructure assets across the globe. These assets fall into the following categories:

  • Midstream natural gas pipeline networks
  • Transportation assets, including ports, toll roads, and railway lines
  • Natural gas and electric utilities
  • Data infrastructure, including fiber optic lines and cellular towers 

About 95% of these assets are either regulated or operated under long-term take-or-pay contracts, which makes them fairly reliable generators of cash flow. Cash flow is particularly important for Brookfield, due to its master limited partnership (MLP) status. In exchange for favored tax treatment, MLPs are required to distribute almost all their cash flow to unitholders as distributions, much in the same way a standard C-Corp distributes cash to stockholders as dividends.

Despite its diversification and the general recession-resistance of infrastructure assets, all of Brookfield's assets aren't going to outperform all of the time. For example, as COVID-19 travel restrictions went into effect, Brookfield's transportation division suffered. But Brookfield is always looking to acquire undervalued assets and believes that the current recession may bring significant opportunities to do so.

The case for NextEra

While Brookfield is diversified, NextEra is more focused. It operates in just two areas:

  • Operating the electric utilities Florida Power & Light and Gulf Power, which have a combined 5.5 million customer accounts across Florida 
  • Generating renewable energy from solar, wind, and nuclear power facilities across the U.S.

As an electric utility in a hot Southern state, NextEra benefits from a reliable stream of regulated cash flow from its utility customers. Those customers use about 54% of the total electricity that NextEra generates, which allows it to sell the remainder to other utilities for a second cash flow stream. It uses the cash to upgrade its existing network and invest in additional wind and solar-generation projects, as well as funding its dividend. NextEra just joined the ranks of Dividend Aristocrats, companies that have upped their dividend annually for 25 years or more. 

NextEra sells its excess power to a diversified group of third-party utilities and businesses, mostly under long-term contracts. This broad customer base means that NextEra's cash flows are stable and likely to grow as NextEra brings more facilities online. The company's current backlog of solar and wind projects includes about 14.4 gigawatts of additional generation capacity, a portfolio larger than the current solar and wind assets of all but two companies in the world.

Head to head

In terms of cash flow reliability and diversification, the companies are on roughly even footing. To figure out which is the better buy, we'll have to dig into the numbers.

Currently, Brookfield's yield of 4.6% crushes NextEra's 1.9%. For dividend investors, that may be enough to tip the scales in Brookfield's favor. However, over the last five years, NextEra's share price growth has crushed Brookfield's, 158.5% to 65%. When you factor in dividend reinvestment to look at total returns, NextEra still comes out ahead over the last 1-, 3-, 5-, and 10-year periods.

Looking ahead, NextEra expects to deliver 6%-8% growth in earnings per share through 2022 and anticipates 10% dividend growth over the same time period. Meanwhile, Brookfield expects to grow, as well, increasing its cash flow per share by 6% to 9% per year, supporting annual distribution growth of 5% to 9%. That's pretty similar, but NextEra seems to have a slight advantage.

However, this expectation of growth means that NextEra's shares are more highly valued than Brookfield's units. Look at how the companies' valuation metrics have changed over the past 10 years:


NEE EV to EBITDA data by YCharts.

In terms of enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio -- which strips out depreciation, making it a good metric to use when comparing infrastructure companies -- as well as price-to-sales ratio and price-to-cash from operations per share ratio, Brookfield's valuation was higher than NextEra's through about 2017 or 2018, and now, NextEra's is noticeably higher. That's not surprising: It means the market is expecting faster growth from NextEra.

And the winner is...

This is a very close contest. While Brookfield has the cheaper valuation metrics, NextEra seems likelier to grow faster and earn its higher valuation. For me, that means NextEra looks like the better buy right now. 

However, if you're a value investor or a dividend investor, Brookfield's shares may be more attractive to you, and honestly, both of these companies look like good buys. But I'm going with NextEra as the better buy... at least right now.

John Bromels owns shares of Brookfield Infrastructure Partners. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Infrastructure Partners and NextEra Energy. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
$90.53 (-0.52%) $0.47
Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
$41.40 (0.41%) $0.17

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