Most stock splits don't create actual value for shareholders. They give investors more slices of the same pie.
However, the recent stock split by Brookfield Corporation (BN 1.92%) is different. It completed a unique four-for-one stock split, where investors received one share of its asset management business, Brookfield Asset Management (BAM 1.38%), for every four shares they currently own. That allowed existing investors to benefit more directly from that business's growth and income. I recently added to my position in both entities and plan to continue buying shares of each.
Splitting off a piece of a great business
Brookfield Corporation focuses on compounding investor capital over the long term. The company has over $125 billion of capital, generating $5 billion of annual free cash flow. It deploys that capital across its three pillars: asset management, insurance solutions, and operating businesses.
The company believes the market needs to give it more credit for the value it has created by building its asset management business over the years. Brookfield Asset Management has grown into a leading global alternative asset manager with over $750 billion of assets. It focuses on renewable power and transition, infrastructure, real estate, private equity, and credit.
The business generates very predictable fee-based earnings and earns carried interest, which is its share of the profits from the funds it manages. Brookfield believes the asset management business's fee-related earnings and carried interest upside make it highly valuable. They split off a portion of that business and distributed it to shareholders for that reason: so they could directly benefit from that value.
I can't get enough of this compounding machine
I started buying shares of Brookfield more than a decade ago. With my latest purchases, Brookfield Corporation is now my sixth-largest holding. The company has been a fantastic wealth creator over the years and delivered annualized total returns of over 19% in the last two decades.
It's in an excellent position to repeat that success over the next 20 years. The company believes that each of its three existing key businesses should be able to compound their values at a more than 15% annual rate. Meanwhile, the company expects to generate substantial free cash flow -- projecting $34 billion over the next five years alone -- the bulk of which it will reinvest into its funds, operating businesses, and other opportunities to further compound shareholder returns. In addition, Brookfield Corporation plans to continue paying a modest but growing dividend.
I love the capital appreciation potential offered by Brookfield Corporation. That's why I plan to continue buying shares to make it one of my top-five holdings.
I'm excited to own this dividend machine
I was initially on the fence about Brookfield's decision to split off a portion of its asset management business and distribute it to shareholders. However, the more I've learned about the company, the more excited I am to own a piece of it.
Asset management is a lucrative and stable business generating lots of fee-related earnings without requiring much capital. Because of that, asset managers generate significant and growing free cash flow.
In Brookfield Asset Management's case, it expects to grow its fee-related earnings at a 15% to 20% annual clip. The company has high conviction in that view because of the long-term nature of the asset management business. It has already locked in its growth targets for the next few years due to the funds it raised previously. Thus, it's focused on securing the next phase of its growth by launching new funds.
With minimal need for this cash, Brookfield Asset Management plans to distribute 90% of its earnings to shareholders via a dividend. Meanwhile, it sees that payout growing along with fee-related earnings, or at a 15%+ annual rate. Given the current share price and recently set dividend rate, Brookfield Asset Management offers investors a more than 4.5% dividend yield. Add in its projected growth, and it provides a very attractive passive income stream.
This unique stock split could enhance shareholder value
Stock splits usually result in investors getting more shares of the same company. However, Brookfield's unique split saw it give investors shares of its asset manager. By splitting off a portion of its asset manager, Brookfield will enable its investors to enjoy a more attractive and fast-growing dividend, which should lift the value of both entities. Because of that, I plan to continue buying both sides of this split in the coming months and years.
