Demand for infrastructure comes from two primary sources. First is the need to upgrade developed world infrastructure. Second is the need for the developing world to build out new infrastructure to support economic growth. Both are powerful long-term revenue drivers and will drive growth at an infrastructure ETF like the iShares Global Infrastructure ETF (IGF 0.98%), a construction equipment company like Caterpillar (CAT -0.55%), and industrial technology company Trimble (TRMB 0.19%). Here's why.
The best infrastructure ETF to buy
The iShares Global Infrastructure ETF is an excellent way to get broad-based exposure to the segment. While other infrastructure ETFs invest solely in U.S. companies or have heavy exposure to media and communications companies, the iShares offering focuses on global infrastructure holdings. Nearly all of its investments are in utilities, transportations stocks, and energy -- toll road companies, energy pipelines, airport operators, power companies, etc.
It's a pure-play global infrastructure investment, so it offers exposure to both of the themes outlined in the introduction. In addition, given that many infrastructure companies tend to be relatively mature and cash generative, the ETF manages to pay a healthy dividend (current yield is 2.7%) while offering the prospect of long-term capital gains. As a result, I think it's the best all-around infrastructure ETF.
Caterpillar, infrastructure, and the long-term commodity boom
The company is best known for its construction equipment, so the link to infrastructure investment is obvious. However, a breakout of Caterpillar's profit in 2021 shows the combination of resource industries (mining and aggregates) and energy & transportation (oil & gas, power generation turbines, industrial turbines, and locomotives) generated $350 million more profit than the construction industries segment.
Data source: Caterpillar presentations.
It's not just about construction equipment and the commercial/government/retail construction market that drives Caterpillar's sales. If the world is going to step up investment in mining commodities, energy, and rail networks to support infrastructure development, then Caterpillar is likely to be a winner all around.
In tandem with the underlying trend of infrastructure investment, Caterpillar also has the potential to benefit from a possible long-term upcycle of investment in the mining and energy industries. Following a fall in commodities prices in 2014, many commodities companies cut spending, leading to a multiyear low in investment in, for example, oil & gas spending in 2020.
Now that commodities prices have risen and the medium-term supply outlook is becoming murkier due to the war in Ukraine (Russia and Ukraine are both major commodity exporters), miners and energy companies may ramp up capital spending over an extended period, not least to play catch-up with previously forestalled investments.
Image source: Getty Images.
Trimble, an under-the-radar infrastructure play
The positioning technology might not superficially strike readers as an infrastructure play, but hear me out. Trimble's technology helps companies position, model, analyze, and manage their physical assets better. Its key end markets are transportation (for example, real-time monitoring of trucking fleets), resources and utilities (precision agriculture), geospatial (mapping and positioning), and construction (buildings and infrastructure).
The buildings and infrastructure segment was responsible for 43% of Trimble's operating income in 2021, with resources and utilities at 28% and geospatial at 23%. A general uplift in construction, infrastructure, utilities, and energy spending will obviously benefit Trimble. Still, there's a deeper, more secular, underlying drive behind its growth in those sectors.
Image source: Getty Images.
Trimble's technology enables more precise positioning and, therefore, more efficient completion of construction and infrastructure projects. Given the notorious problem of cost overruns and waste in the industry, Trimble's technology can generate significant value for governments and companies investing in infrastructure. In addition, reducing waste will help customers meet their carbon emissions targets for construction -- the industry is a significant contributor to carbon emissions.
Trimble should also be included on lists of companies benefiting from infrastructure spending.
