Today's yield-starved investors might be tempted to look at regulated utilities such as Consolidated Edison (ED 2.01%) as a source of safe, steady dividend income, and indeed, the New York City utility giant -- serving 3.3 million electricity customers and 1.1 million gas customers -- is certainly all of that.
This article is not meant to argue that investors in Consolidated Edison are likely to lose money with this investment (its 21-year total return of 9.8% has matched the markets), but that there are alternative investments, equally safe but with higher yields, faster dividend growth rates, and superior growth potential.
Consolidated Edison: underwhelming growth potential
For the first time in 60 years, New York City's population is growing and creating strong job growth (200% of jobs lost in 2009 recovered, second only to Houston).
In addition, New York City is in the process of transitioning from heating oil to natural gas, with over 2 million people making the switch since 2010.
These two trends should mean strong earnings growth for an electricity and gas utility like Consolidated Edison. However, management is projecting only 1.9% annual growth in electricity demand for the next five years, and 3.8% growth in gas demand. With $8.5 billion in capital costs scheduled over the next three years, this forecasted growth is expected to result in a 10-year earnings growth rate of 2.4%.
Analysts are projecting Consolidated Edison's 10-year dividend growth rate will be 1.94%, in line with its historical 1.89% (over the last 21 years).
Superior alternatives from infrastructure
| Company | Yield | 10-Year Projected Divided Growth Rate | 10-Year Projeced Annual Total Return |
|---|---|---|---|
| Consolidated Edison | 4.40% | 1.92% | 6.60% |
| Brookfield Infrastructure Partners | 4.70% | 6.86% | 12.10% |
| CorEnergy Infrastructure Trust | 6.90% | 3.71% | 11.34% |
Brookfield Infrastructure Partners (BIP +0.17%) and CorEnergy Infrastructure Trust (CORR +0.00%) are two superior ways for long-term income investors to earn safe, growing income, plus superior capital gains to boot.
Brookfield Infrastructure Partners is one of the best ways to play global infrastructure, representing one of the best-managed and most diversified portfolios of assets on earth.
- 3,400 km of toll roads in Brazil and Chile
- 98% of power transmission lines in Chile
- 15,500 km of natural gas pipelines in North America
- Railroad monopoly in western Australia
- World's largest coal export terminal
- 2.1 million gas connections in the U.K.
- 30 global ports
- 2 container ports in California
In the first quarter, Brookfield added $250 million to its already large $5 billion project backlog as well as closed on five investments. These include closing on the California container terminals, acquiring container terminals in New York and South America, and acquiring district power systems (steam for heat) in Chicago and Seattle.
Of Brookfield Infrastructure's cash flow, 90% is either regulated or on very long contracts, with 70% indexed to inflation and 60% with no volume risk (recession protection).
Under the excellent guidance of Brookfield Asset Management ($175 billion under management and 100-year history of managing real estate, infrastructure, and utility assets),Brookfield Infrastructure Partners just announced adjusted funds from operation (AFFO)/unit (which pays the distribution) growth of 11% over 2013.
With $2.6 billion in liquidity, an enormous project backlog, and management successfully achieving its goal of 12%-15% returns on its investments, Brookfield Infrastructure Partners is well on its way to achieving its distribution growth guidance of 5%-9%.
CorEnergy Infrastructure Partners is a new energy infrastructure REIT and great way to play the coming $780 billion energy infrastructure boom. Its principle managing director, David Schulte, is the legendary founder of Tortoise Capital Advisors, a $17 billion energy infrastructure investment company whose primary fund has returned 13.2% annual total returns over the last 11 years compared to the market's 7.2%.
CorEnergy operates by purchasing high-quality energy infrastructure assets at good prices (management targets 8%-10% rates of return) and then rents them back to the party from which they purchased the asset, under a long-term and inflation indexed triple-net lease.
Triple-net leases are leases in which the lessee pays all maintenance and operation costs. This benefits CorEnergy because it avoids expensive maintenance and capital expenditures while generating secure, growing, and inflation-protected cash flows. The energy company leasing the infrastructure benefits because it receives cash upfront with which to grow its business while still maintaining operational control.
CorEnergy currently owns these infrastructure assets:
- Liquid gathering systems in Pinedale, Wyoming gas field leased to Ultra Petroleum under a 15-year lease.
- 40% stake in Eastern Interconnect Electrical Transmission Line in New Mexico.
- 1.5 million barrel oil storage terminal in Portland, Oregon under a 15-year lease.
- 10 year $11 million loan at 12% for fracking water storage facility in Wyoming.
- Omega gas pipeline serving Fort Leonard Wood Missouri.
- 6.7% stake in LNG storage facility in Mississippi and a 11.1% stake in four sand and gravel mines in Tennessee.
Foolish takeaway
Consolidated Edison is a safe but underwhelming utility likely to deliver subpar total returns over the long term because of its sub-2% dividend growth. Brookfield Infrastructure Partners and CorEnergy Infrastructure Trust offer superior yield, dividend/distribution growth, and capital gains opportunities. Brookfield Infrastructure's asset base offers far more diversification than Consolidated Edison's. While still small, CorEnergy is poised to grow quickly through superior management and immense opportunity stemming from America's coming energy infrastructure boom.
