Infrastructure investing is one of the more misunderstood niches out there. Ninety-nine percent of the time, it's a bunch of slow and steady investments that throw off cash to investors and generate returns over the long haul. The remaining 1% is based on the hype cycle of an election and the multitrillion-dollar infrastructure investment proposals that come with it that rarely deliver as promised.
Investing in infrastructure stocks is best when you avoid the political hype and focus on those companies that will generate value for years and years into the future regardless of who is president or who controls the congressional purse strings. Three infrastructure stocks that look especially interesting this month are Brookfield Infrastructure Partners (BIP -0.80%), Teck Resources (TECK 1.70%), and Hannon Armstrong Sustainable Infrastructure Capital (HASI 2.12%). Here's why you may want to consider them for your portfolio right now.
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The value creator
Brookfield Infrastructure Partners is one of those companies that could end up on this list any month of the year because it has been one of the most consistent value creators for investors. The company's portfolio of assets spans four continents and gives investors exposure to a wide swath of infrastructure, including toll roads, electric transmission lines, fiber optic lines for data transmission, terminals and ports, and oil and gas pipelines.
Almost all of these are considered slow- to no-growth industries that throw off tons of cash, but Brookfield's management has done an incredible job over the years managing the portfolio to generate growth. Through a combination of construction, acquisitions, refinancing, and asset sales, it has grown EBITDA by 11% annually and generated a total return that has smashed the broader market.
Even more encouraging is that the company still has plenty of room to grow. Management estimates that global infrastructure spending needs between now and 2040 are around $80 trillion. With an investment-grade balance sheet and about $3 billion in liquidity to do deals right now, there is a lot of financial firepower to grow the portfolio.
Perhaps the biggest drawback to investing in Brookfield Infrastructure today is that its stock is trading at rather frothy valuation. Its current distribution yield of 3.3% is right around the lowest it has ever been since it went public more than a decade ago. But considering management has been able to raise the payout by 10% annually since taking the company public, not to mention the consistent track record for creating value for investors, it seems worth the valuation premium today.
Charging the electrification of everything
One of the more unappreciated aspects of renewable energy, lithium-ion batteries, and electric-vehicle (EV) trends is the amount of raw materials we will need for them. Copper is arguably the most important, and Teck Resources looks like an incredible value to capture growing demand for the metal.
For example, let's look just at EVs. A research report from Goldman Sachs noted that an EV requires 4 times as much copper per vehicle as a vehicle with a conventional internal combustion engine. That same report states that EVs, charging infrastructure, and solar and wind power alone are expected to require about 5 million tons of copper annually by the end of the decade. That would boost total global demand by about 16%. Teck Estimates that copper demand from electrification will grow 26% annually over the next decade.
Even though Teck Resources is a diversified mining company that includes steelmaking coal, zinc, and oil, management is making a deliberate shift toward copper. It is in the process of a $5.7 billion copper mine expansion that will nearly double its copper output by the end of 2022. In addition, it has another five prospective mines in the portfolio that management expects to either sell to fund other developments or partner with others to develop.
Investing in mining is a cyclical business, and there is always the concern that development of new supplies will outpace demand growth and lead to lower prices. That said, Teck appears to be in a great position with an investment-grade debt rating and a reasonable valuation right now, and it could be an interesting investment this month.
BIP total return price; data by YCharts.
An innovative approach to sustainability
For all the excitement surrounding sustainable infrastructure, there aren't a lot of great investment options on the public markets. For one thing, markets like renewable energy can be cyclical despite overall growth trends. Another challenge is that many companies in the industry have struggled to turn a profit for years or have balance sheets that make you want to hold your nose. Hannon Armstrong Sustainable Infrastructure, though, looks like one of the more interesting investments in this space to consider.
Think of Hannon Armstrong as something like a mortgage real estate investment trust. Instead of owning a portfolio of home mortgages, though, it owns a portfolio of debt, equity, land, and everything in between that's used to fund renewable energy, energy storage, climate resiliency, and energy efficiency projects.
The entire investment thesis for Hannon Armstrong is management's ability to underwrite these various investments. While its track record is short, it has so far delivered impressive results, with 99% of its portfolio performing as underwritten and 1% slightly below metrics. The company has $8 billion in managed assets, and management has a pipeline of $3 billion in new deals to grow the portfolio.
Hannon Armstrong's growth projections over the next few years aren't eye-popping -- management is projecting non-GAAP earnings per share to grow 7% to 10% annually -- but it has established a strong track record of underwriting investments, and a dividend yield of 2.6% today makes it an interesting option to consider right now.
