Brookfield Infrastructure Partners (BIP 0.04%) has been a top-quality dividend stock since its formation in 2008. The global infrastructure giant has increased its payout in each of the last 14 years, growing its distribution at a 9% compound annual rate. Meanwhile, it offers a very attractive yield at 4.5%.
The partnership, and by extension, its corporate twin Brookfield Infrastructure Corporation (BIPC -0.76%), should be able to continue growing the payout. A big reason is the durability and embedded growth profile of its cash flow.
A stable business
Brookfield Infrastructure operates a large-scale, globally diversified portfolio of infrastructure businesses. They span the utilities, transport, midstream, and data sectors. However, the company's infrastructure businesses share one factor in common. They produce very predictable and steady cash flows.
One stabilizing force is the frameworks supporting the revenue generated by its business segments:
Image source: Brookfield Infrastructure Partners Investor Relations Presentation.
As that slide showcases, long-term contracts or government-regulated frameworks underpin 90% of its funds from operations (FFO). These structures provide the company with very predictable cash flow to support its dividend.
Meanwhile, its cash flows are also very stable:
Image source: Brookfield Infrastructure Partners Investor Relations Presentation.
As that slide showcases, 70% of Brookfield's FFO has no volume or price exposure. Because of that, the company can bank on that income no matter what's going on in the economy. That provides Brookfield Infrastructure with an extremely solid base of cash flow. It's enough to completely support the company's dividend, given its payout ratio of 60% to 70% of FFO.
Meanwhile, another 20% of the company's cash flow is rate regulated with exposure to the global economy. While that gives it some downside risk on volumes in an economic downturn, it also provides upside potential in a growing economy. Over the long term, Brookfield expects gross domestic product (GDP) growth to drive 1% to 2% annual expansion of its FFO per unit.
Finally, about 10% of the company's FFO has volume and pricing risk to the market cycle, primarily in its midstream segment. While that's a drag when commodity prices are down, Brookfield benefits when those prices rebound.
Organic growth drivers
GDP growth is one of three organic drivers that should steadily expand Brookfield's FFO per unit without it needing to invest additional capital above its retained cash flow. Another driver is inflation:
Image source: Brookfield Infrastructure Partners Investor Relations Presentation.
As that slide shows, 70% of Brookfield Infrastructure's FFO benefits from inflation because many long-term contracts and regulated frameworks index rates to inflation. Brookfield estimates inflation will add 3% to 4% to its FFO per share each year over the long term. That's even with some negative inflation exposure in the midstream sector.
Brookfield has a nice base of embedded growth from its upside exposure to GDP and inflation. Those two factors can grow its FFO per unit at a 4% to 6% annual rate without the company investing additional capital.
Meanwhile, the company believes reinvesting its retained cash flows after paying the dividend into expansion projects will add 2% to 3% to its FFO each year. That will boost its organic growth rate to 6% to 9% annually. This pace easily supports the company's plan to increase its distribution at a 5% to 9% annual rate. The company's current $6 billion capital project backlog should help supply incremental FFO over the next three years as those projects enter service.
The company can grow even faster by recycling capital, a strategy of selling mature assets and reinvesting the proceeds into higher return opportunities. Brookfield targets to make over $1.5 billion of new investments each year. Over the past year, it has exceeded that goal, closing $2.9 billion of deals. It funded that by selling five businesses for $1 billion and has another $2 billion of sales underway. That helped drive 12% FFO per unit growth last year and has the company on track to grow by double digits again this year. With FFO growing faster than the distribution -- Brookfield increased its payout by 6% earlier this year -- it's putting its payout on an even firmer financial foundation and retaining more cash to fund organic growth.
An easy choice for dividend income
Brookfield Infrastructure generates very durable income that steadily rises alongside inflation and the global economy. It can boost its income growth rate by reinvesting retained cash into expansion projects and recycling capital. Those drivers should enable the company to continue increasing its attractive dividend for years to come. Because of that, it's a no-brainer for those desiring to collect dividend income.
