Brookfield Infrastructure (BIPC +0.00%)(BIP +2.34%) recently reported record second-quarter results. The global infrastructure operator's funds from operations (FFO) surged 30%. Although a needle-moving acquisition was the primary driver, the company also benefited from elevated inflation, which allowed it to increase its contract rates.
Brookfield's inflation-driven growth bodes well for its dividend. The company aims to grow its payout, which currently yields 3.1%, by 5% to 9% per year. With inflation fueling organic growth above the top end of its annual target range, Brookfield could grow its payout at a high-end rate in the coming years if inflation remains high.
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Key Data Points
Inflation-linked earnings
Long-term contracts and government-regulated rate structures support about 90% of Brookfield Infrastructure's earnings. Most of these contracts have escalation clauses enabling Brookfield to boost rates at the pace of inflation. Overall, 70% of its earnings grow alongside inflation.
With inflation running hot, these contracts are paying big dividends for Brookfield. The infrastructure company noted that its FFO grew by 10% organically in the second quarter, coming in above its 6% to 9% annual target, reflecting the elevated inflation driving its rates higher.
The company's toll-road portfolio was one of the big beneficiaries here as well. Brookfield noted that FFO across its global toll-road portfolio was up 16%, driven by inflationary tariff increases and an 8% uptick in traffic levels.
Brookfield's rail segment also benefited from such tariff increases, which helped offset softer volumes and the impact of foreign exchange fluctuations. Inflation also benefited the company's utility operations and its data infrastructure businesses.
This boost should continue
Brookfield's existing businesses will continue to benefit from inflation, given that 70% of its earnings remain linked to it. In addition, the company recently made moves to increase its exposure to this upside by acquiring two businesses with inflation-driven rate structures.
The company is making a $1.3 billion investment in the acquisition of HomeServe (HSV +0.00%). It provides subscription-based, recurring home-repair policies for crucial infrastructure of homeowners in North America and Europe. Those contracts feature inflation-protection mechanisms that will protect HomeServe's cash flow.
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Key Data Points
Brookfield is also investing $600 million into the acquisition of a telecom tower company in Germany. It expects significant organic growth in this portfolio, driven by inflation-indexed rates, new tower builds, and adding more tenants to existing towers. Brookfield and its partners also expect to leverage this portfolio's scale to consolidate smaller tower portfolios in Europe.
Meanwhile, the company continues to organically expand its existing businesses through development projects. Brookfield is investing several billion dollars over the next few years into a variety of expansion projects, most supported by long-term, inflation-linked contracts. As this new infrastructure enters service, it will provide an immediate boost to the company's cash flow, with long-term growth from inflation-driven rate increases.
A protected income stream
Inflation is having a huge impact these days. While it's a negative for many companies because it's increasing costs, it's providing a boost for Brookfield because of its inflation-linked contracts. That enables the company to raise rates at the pace of inflation, protecting its cash flows. When we add in the positive boost from its expansion projects and acquisitions, Brookfield is growing its FFO well above inflation.
That's great news for dividend investors. Brookfield should be able to grow its payout toward the high end of its target range in the coming year, giving its investors an inflation-protected income stream. That makes it an even more appealing passive-income stock for the long term.
