Brookfield Infrastructure (BIP +1.96%)(BIPC +0.00%) has a long history of steadily expanding its operations. The company has grown its funds from operations (FFO) per share at a 15% compound annual rate since its inception in 2009. That has enabled it to consistently increase its dividend yield (which currently clocks in at around 3.7%) at a 10% annual rate.
Brookfield is about to enter its next expansionary phase, fueled by its pending acquisition of Inter Pipeline (IPL +0.00%). The deal was one of the central themes of the infrastructure company's second-quarter shareholder letter. Here's a closer look at why it's so excited to bring that company into the fold.
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A hard-fought battle
Brookfield has been trying to acquire Inter Pipeline for more than a year. The company publicly revealed its offer in February. After lots of back and forth and a rival bid from another energy infrastructure company, Brookfield emerged victorious in late July when that suitor bowed out.
Brookfield Infrastructure's CEO Sam Pollock commented on that deal in the second-quarter letter:
With respect to growth initiatives, our patience paid off in our bid to privatize Inter Pipeline Ltd. (IPL). With the endorsement of IPL's Board of Directors and guidance on the merits of our bid from two prominent proxy advisors, Brookfield Infrastructure now has a clear path to acquire IPL. If successful, Brookfield Infrastructure will deploy approximately $2 billion of equity in a high-quality Canadian midstream operation. The completion of this acquisition is expected in the third quarter and will mark the start of the next expansionary period for our business, which should drive strong FFO per unit accretion.
As Pollock noted, Inter Pipeline is a needle-moving transaction for the company as it sets the stage for its next growth phase. That's why it fought so hard to secure a deal.
What Inter Pipeline brings to the table
As an income-focused company, one of the primary draws of Inter Pipeline is its contractually secured cash flows. It operates a diversified portfolio of energy infrastructure, including oil pipelines, bulk liquid storage terminals, and natural gas liquids processing plants. Most of these assets generate stable cash flows supported by cost-of-service and other fee-based contracts.
But that wasn't the only reason Brookfield wanted to acquire Inter Pipeline. Inter is also investing in a new petrochemical plant that will come on line in the next few months. The project will significantly boost its cash flows, with the bulk of the revenue supported by fee-based contracts. In addition, Pollock noted in the shareholder letter that "during our extended diligence period, we identified a number of strategic priorities for the company that will help drive top-line growth for the years to come."
When combining Inter Pipeline's growth with Brookfield's other organic growth initiatives, which include a contracted backlog of more than $2 billion in projects, it says that it expects annual organic growth at or above the high end of its 6% to 9% target range in the near term. That's in addition to the near-term acquisition-fueled boost it will get from investing $2 billion into the privatization of Inter Pipeline. The company noted that mergers and acquisitions could add as much as 5% to its FFO per year, even as it continues to sell assets as part of its capital recycling program to fund more-accretive new investments like Inter. That should give the company plenty of fuel to continue growing its dividend, which it sees expanding at a 5% to 9% annual rate.
A fully fueled growth engine
Brookfield Infrastructure has delivered double-digit annual FFO and dividend growth for more than a decade. While the pandemic and some asset sales slowed its pace last year, it's hitting the accelerator in 2021, fueled in large part by the Inter Pipeline deal. That transaction will provide an acquisition-powered boost this year and additional organic growth over the next couple of years, enabling Brookfield to grow at a fast pace.
Add that growth to its high-yielding distribution, and the company has the fuel to continue generating market-beating total returns in the coming years, making it look like a great buy these days.
