Brookfield Infrastructure Partners (NYSE:BIP) is a one-stop shop for anyone looking to invest in infrastructure assets. With a roughly 4.2% yield and a solid history of distribution growth, it will definitely please income investors in today's low-yield world. But where will Brookfield Infrastructure Partners be in five years? Here's the long and short answer to that important question.
The easy answer
The key to understanding Brookfield Infrastructure's long-term future is to understand how it grows. At its core, the master limited partnership owns and operates large physical assets that throw off reliable streams of cash because they are vital to the customers they serve. It passes a material amount of the cash through to its unitholders in the form of distributions. In order to grow its business, and keep extending its 13-year streak of annual distribution increases, Brookfield Infrastructure needs to buy more infrastructure assets.
Thus, the simple answer to the question of where Brookfield Infrastructure Partners will be in the future is "bigger." That might be enough for some investors, but it doesn't really get to the heart of the story here. So if you want to really understand what's going on, you need to dig a little deeper and understand how Brookfield Infrastructure manages its business.
The long answer
Brookfield Infrastructure Partners is managed by Canadian asset manager Brookfield Asset Management (NYSE:BAM), which has an over 100-year history of investing in infrastructure assets. However, it has never been a buy and hold type investor. Brookfield Asset Management is active and so is the partnership it runs. It looks for out of favor assets to buy and is willing to sell assets it owns if it can get a good price for them. The proceeds from asset sales, meanwhile, are used to help fund asset purchases so it doesn't have to tap the capital markets every time it wants to buy something. This is just the norm for the business.
However, don't think that it's just "wheeling and dealing." That's not the case and never has been. An important part of the process here is to take the out of favor assets it buys and improve them, which helps increase their value over time. Running the infrastructure assets it owns well also helps back up the regular increases in the fees that Brookfield Infrastructure charges customers. That's worth keeping in mind because acquisitions can be lumpy in nature. So even when the partnership isn't buying or selling things, it is still working hard to increase the value of its portfolio and the cash flows its assets generate.
That said, 2020 has been a fairly active year. Brookfield Infrastructure Partners has sold $500 million worth of assets, with another $700 million planned in the near future. That cash is being invested in European and Indian telecom assets (around $750 million combined) and North American midstream assets (about $425 million), a deeply out of favor energy sector niche today. The partnership believes these changes will increase its funds from operations (FFO) by around 5%.
There's one more interesting thing that happened in 2020. In late March, Brookfield Infrastructure Partners enacted a stock split, in which it gave 0.11 share of a non-partnership structured stock to each unitholder of its partnership units. Effectively it created a way for investors to own Brookfield Infrastructure without the need to deal with the tax complications of owning a partnership. Although this move makes it look like the distribution was cut by 10% or so, that's not the case. Each unitholder is still receiving the same distribution, you just have to add up the payments from the stock and the partnership units.
The stock is known as Brookfield Infrastructure Corporation (NYSE:BIPC). While this move is a bit of a technical issue in some ways, it's actually a fairly exciting development, especially for dividend investors who want to keep their tax life as simple as possible. However, the bigger picture here is that Brookfield Infrastructure has created a new way to access the capital markets and therefore foster its long-term growth. So, Brookfield Infrastructure is not only selling older assets and buying newer ones in 2020, which will support long-term growth, it is also laying the foundation for even easier access to capital down the line -- which further supports long-term growth.
Bigger in an interesting way
So while the easy answer here is that Brookfield Infrastructure Partners will be bigger in five years' time, the story between now and then is hardly written in stone. And there's likely to be a lot of activity over the span. That will probably include buying and selling assets, operating those assets in top-notch form to increase revenues and the value of those assets, and taking advantage of its new share structure to tap into investors who might not have been interested in buying a master limited partnership. In other words, expect a very interesting five-year growth story at Brookfield Infrastructure Partners.