Brookfield Infrastructure (BIPC 0.32%) (BIP -0.47%) recently reported its fourth-quarter results. One of the recurring themes from that report was the positive effect it's seeing from inflation. That was one of many catalysts helping drive a remarkable year for the company. With inflation still running hot, Brookfield expects 2022 to be another good year.
That optimistic view gave the company the confidence to boost its dividend by another 6%, marking the 13th straight year it increased its payout.
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Inflation-driven growth
Brookfield Infrastructure generated $1.7 billion of funds from operations (FFO) in 2021, a 19% increase from 2020. Several catalysts drove that increase, including strong growth in its base business, a full recovery from shutdown-related effects in 2020, and the contribution from the more than $3 billion it invested in expanding its business.
On an organic basis, Brookfield's FFO rose 9%. That's due to the initial benefits from elevated inflation levels, the completion of $900 million of expansion projects, and higher market-sensitive revenues from improving demand. These catalysts helped more than offset the effect of the $2 billion of assets Brookfield sold last year as part of its capital recycling program.
Each of Brookfield's four business segments saw some benefits from inflation last year:
- Utilities segment: FFO grew 11% on a same-store basis, driven by inflation indexation on the rates it charges and the commissioning of $430 million of capital projects. The segment also benefited from acquiring an additional interest in its Brazilian gas pipeline. These catalysts more than offset the effect of the sale of its U.K. smart meter portfolio and North American district energy business.
- Transportation segment: FFO jumped nearly 20%, driven by volume increases, inflationary tariff increases, and a full year of its U.S. LNG export terminal. These factors offset the partial sales of its Australian export terminal and Chilean toll road.
- Midstream segment: FFO surged 70%, primarily driven by the acquisition of Inter Pipeline in the fourth quarter. Midstream earnings also benefited from higher commodity prices, which more than offset the sale of an interest in its U.S. gas pipeline.
- Data segment: FFO jumped 21%, driven by the construction of 12,000 telecom towers. It also benefited from inflation indexation and higher rates across the portfolio.
Brookfield's inflationary tailwind
Brookfield Infrastructure's CEO Sam Pollock addressed the red-hot topic of inflation in his quarterly letter to investors. He wrote, "All else equal, this higher inflation is favorable for stable infrastructure businesses like ours."
Pollock noted that due to the factors driving inflation -- pandemic-induced supply chain disruptions, fiscal stimulus, labor shortages, and the influences of de-carbonization -- Brookfield doesn't see it as transitory (i.e., lasting one year). Instead, it expects a period of higher inflation, but not long-lasting inflation as occurred during the 1970s.
Given this view of elevated inflation in the near term, Brookfield sees it acting as a tailwind for its business. That's because "a significant portion of our business has inflation indexation." Pollock noted that:
Today, approximately 70% of revenues are adjusted by local inflation indexes. This benefit will largely impact our utilities, transport and data investments, where between 80-90% of revenues are contractually indexed to inflation. Further, more than 50% of our midstream business will either capture contractional inflation escalators or see EBITDA growth driven by higher commodity prices and pass-throughs on fee-for-service models. Together with a largely fixed-cost structure and prudent cost management strategies, the compounding impact of inflationary revenue increases should drive operating leverage across our high-margin critical infrastructure.
Pollock noted that this inflationary economic environment isn't without risks. However, he believes Brookfield can effectively manage or mitigate the biggest ones. For example, Pollock believes Brookfield will see a negligible effect on margins from rising labor and capital costs. That's largely because it benefits from a fixed cost structure. As just one example, Pollock noted that Brookfield transferred all the construction risk on its electricity transmission project in Brazil to its joint venture partner through a buyout price adjustment mechanism.
Meanwhile, Brookfield sees minimal effect from rising interest rates. It has proactively locked in long-term, fixed-rate debt for 90% of its borrowings. Because of that, rising interest rates won't be much of a headwind.
Well-positioned to keep growing
Because Brookfield will benefit from continued inflation, it expects its FFO to keep rising in 2022 and beyond. On top of that, the company has already secured more than $700 million of new investments. That's half of its 2022 growth target. Brookfield firmly believes it can achieve its goal because it has a large pipeline of opportunities and plenty of liquidity. That should give it even more fuel to continue growing its dividend in the coming years, making Brookfield a great stock for investors seeking an inflation-protected income stream.
