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Better Buy: Brookfield Infrastructure Partners vs. Clearway Energy

By Matthew DiLallo - Feb 28, 2021 at 9:21AM

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These high-yielding infrastructure companies go head-to-head.

With the stock market surging over the past year, it's getting harder to find a compelling dividend yield. The S&P 500's rise in recent months pushed the average stock's yield down to around 1.5%.

However, there are a few compelling dividend stocks out there, especially in the energy infrastructure sector. Two of the better options are Brookfield Infrastructure (BIP 1.03%)(BIPC 1.86%) and Clearway Energy (CWEN 1.39%)(CWEN.A), which yield 3.9% and 4.6%, respectively. Here's a closer look at which one is the better buy.

Oil pumps, a natural gas well, and solar panels with the sun setting in the background.

Image source: Getty Images.

The bull and bear case for Brookfield Infrastructure

Brookfield Infrastructure has done a masterful job creating shareholder value over the years. The diversified global infrastructure operator has produced an average annual total return of 18% since its inception more than a decade ago. Fueling that growth has been double-digit increases in its cash flow and dividend during that period. 

Brookfield believes it can continue to create value for shareholders over the coming years. It estimates that its existing utility, transportation, energy midstream, and data infrastructure businesses can fuel 6% to 9% annual earnings growth as the company improves margins, benefits from economic growth, and completes expansion projects. On top of that, it estimates that acquisitions can add another 1% to 5% to its bottom line each year. It's currently working on a needle-moving deal to acquire Canadian oil infrastructure company Inter Pipeline (IPL). Meanwhile, it has a strong balance sheet and conservative financial profile to fund its growth. It's in the process of enhancing its flexibility by selling its North American district energy business and a stake in a natural gas pipeline company.

However, one long-term concern with Brookfield Infrastructure is its exposure to fossil fuels, given the rapid acceleration of the energy transition to renewable energy. The company has spent the past few years focused on acquiring energy midstream assets. While most of those deals were for infrastructure supporting cleaner-burning natural gas, Inter Pipeline concentrates on oil, with most of its earnings from Canada's oil sands region, which has an even higher carbon emissions profile than other types of crude oil. Brookfield sees value in the sector given that the global economy will continue to need oil for several decades. However, the proposed deal might not pay dividends if the transition to cleaner alternatives speeds up.

Wind turbines at sunset by the shore.

Image source: Getty Images.

The bull and bear case for Clearway Energy

Clearway Energy has a bit of a spotty track record when it comes to creating shareholder value. It has underperformed the market since its formation, due in part to some troubles sustaining its dividend. That's partly because one of its largest customers declared bankruptcy in 2019.  

However, the renewable energy and natural gas power generating company's problems seem to be in the past. That customer reemerged last year, enabling Clearway to reset its dividend. Meanwhile, it's benefiting from the acceleration in clean energy investments.

The company estimates that it can grow its cash flow and dividend at a 5% to 8% annual rate over the next several years as it invests in new cash-flowing clean energy assets. It sees higher-end growth this year, thanks to several investments it made in recent months. Some of those deals should also help power future growth, given their timelines. Meanwhile, it has a strategic relationship with a renewable energy project developer that should provide a steady stream of new investments.

However, one potential issue with Clearway is its ability to finance this growth. The company pays out 80%-85% of its cash flow via dividends, leaving it with less reinvestment funding than Brookfield, which targets a 60% to 70% payout ratio. Meanwhile, it doesn't have a strong investment-grade balance sheet like Brookfield, so it has had to be creative in funding investments. As long as it can continue securing financing, it should be able to deliver on its targeted dividend growth.

Excellent options for income-seeking investors

Brookfield Infrastructure and Clearway Energy are excellent stocks for income-investors. However, if I had to choose just one, I'd go with Brookfield Infrastructure. It expects to grow its earnings faster than Clearway in the future, which should enable it to produce higher total returns. On top of that, it has a stronger financial profile, enhancing its flexibility to capture value-enhancing investment opportunities. 

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Stocks Mentioned

Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
$60.20 (1.03%) $0.61
Clearway Energy, Inc. Stock Quote
Clearway Energy, Inc.
$31.77 (1.39%) $0.43
Clearway Energy, Inc. Stock Quote
Clearway Energy, Inc.
Brookfield Infrastructure Corporation Stock Quote
Brookfield Infrastructure Corporation
$71.22 (1.86%) $1.30
Inter Pipeline Ltd. Stock Quote
Inter Pipeline Ltd.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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