Investors typically pay a premium for stocks that are growing at above-average rates. They're willing to pay a higher price now for a company they believe will be even more valuable in the future as it expands its earnings.
However, not all growth stocks trade at premium valuations. Brookfield Infrastructure Partners (BIP +1.94%) (BIPC +0.00%) and NextEra Energy Partners (NEP 2.52%) trade at a discount to the broader market even though they're growing at well-above-average rates. That makes them look like compelling investment opportunities right now.
Growth on sale
Brookfield Infrastructure has an excellent growth track record. The global infrastructure operator has grown its funds from operations (FFO) per unit at an 11% compound annual rate over the past decade. That has supported a 9% compound annual growth rate for its distribution.
NYSE: BIP
Key Data Points
The company increased its FFO per unit by another 12% last year to $2.71. With units of the partnership recently trading at $34.50 apiece, it sells for 12.7 times its FFO. That's a lot cheaper than the broader market indexes. The S&P 500 trades at 18.6 times earnings while the Nasdaq 100 fetches 26.8 times. That low valuation is a big reason why Brookfield Infrastructure offers an above-average dividend yield of 4.4%.
Brookfield Infrastructure is showing no signs of slowing down. The company expects its FFO per unit to grow by 10%+ this year. Powering that forecast are inflation-driven rate growth, recently completed expansion projects, and its capital recycling program. Brookfield secured $2.9 billion of new investments across five transactions that will add to its results this year.
Meanwhile, the company has increasing growth visibility into 2024. It recently agreed to invest in the $13.3 billion privatization of Triton International. The deal should close by the fourth quarter, giving it momentum heading into 2024. In addition, Brookfield and Intel should complete their new semiconductor factories in Arizona next year.
Powerful dividend growth ahead
NextEra Energy Partners also has an exceptional growth track record. The clean energy infrastructure company has grown its distribution to investors by at least a 15% annualized rate since its initial public offering in 2014. The company currently expects to deliver distribution growth of 12% to 15% annually through at least 2026. That's more than double the S&P 500's dividend growth rate of around 6% annually.
NYSE: NEP
Key Data Points
Despite that growth, the company trades at a low valuation. Last year, it produced $7.47 per unit of cash available for distribution (CAFD). With units recently fetching less than $60, NextEra Energy Partners trades at around eight times its free cash flow. That's an extraordinary price to pay for a company growing this fast. The dirt cheap price is a big driver of its 5.4% dividend yield.
The company has lots of visibility into its growth. It recently agreed to buy a 690-megawatt portfolio of operating wind and solar energy projects from its parent NextEra Energy (NEE +0.04%). It's paying $708 million for assets secured by long-term power purchase agreements that should generate $62 million-$72 million of annual CAFD. That should give the company all the incremental cash flow it needs to support its distribution growth for this year.
NextEra Energy owns a vast portfolio of operating wind, solar, and battery storage assets it could drop down to its affiliate. This driver alone could give NextEra Energy Partners enough power to achieve its dividend growth objective. In addition, it's reviewing several organic expansion projects, such as adding battery storage to existing assets or repowering legacy wind farms by installing larger, more powerful turbines. It can also make third-party acquisitions as opportunities arise.
Growth at very reasonable prices
Brookfield Infrastructure Partners and NextEra Energy Partners are outliers among growth stocks. They both trade at very low valuations even though they're growing briskly. Their low valuations also contribute to their high dividend yields. The income and growth combo positions these stocks to produce very attractive total returns over the coming years, especially considering their reasonable valuations.
