Long-term investors know that market crashes represent the best time to earn long-term returns. With slowing global growth and the worst energy collapse in decades decimating numerous energy, mining, and transportation companies, there are three ways in particular that Brookfield Infrastructure Partners (NYSE: BIP) is masterfully using this chaos to grow its business and enrich its long-term investors.
Wide moat business model
Our objective for Brookfield Infrastructure is to build a world-class infrastructure business that is diversified by sector and geography and consists of high quality assets with significant barriers to entry and strong organic growth potential. ... Going forward, we intend to follow the exact same road map ... which is to build out our existing operating platforms and acquire new businesses on a value basis. -- Sam Pollock, CEO
This quote exemplifies why Brookfield Infrastructure Partners is a solid dividend stock.
Management's Buffett-like dedication to opportunistic value investment into wide-moat, steady, recurring, cash flow-rich businesses has built an impressive empire of utilities that span five continents and provides for a generous 5.6% yield. Better yet, that payout is secured by cash flow that is 90% generated by either highly regulated industries or long-term, fixed-fee, inflation-adjusted contracts.
Solidly conservative distribution policy
We generated FFO $210 million in the period, or $0.91 on a per-unit basis, which is up from $178 million, or $0.85 per unit in the same period of 2014. Results benefited from the contribution of our newly acquired communication infrastructure assets, in addition to solid organic growth across the business. -- Bahir Manios, CFO
Not only was Brookfield Infrastructure Partners able to grow its funds from operations per unit by 7% this quarter, but also its adjusted funds from operations (AFFO) -- which actually funds the quarterly distribution -- grew an even more impressive 18%.
More importantly, the quarterly AFFO payout ratio came in at an incredibly conservative 50%, meaning that Brookfield Infrastructure generated $85.1 million in excess cash this quarter. That's money that can be reinvested into its business without having to take on additional debt, or sell new units that could slow the payout growth rate in the future. .
This also means the distribution is not just exceptionally secure, but also easily capable of supporting, and probably exceeding, management's long-term distribution growth target of 5% to 9%.In fact, Brookfield Infrastructure Partners has a strong track record of beating its conservative distribution growth guidance every year since its IPO.
One way it is able to do this is that Brookfield Infrastructure Partners' incentive distribution rights (IDR) agreement with its general partner and sponsor, Brookfield Asset Management (NYSE: BAM), caps the amount of marginal distributable cash flow (DCF) owed to Brookfield Asset Management at 25%. Most IDRs peak at 50%, which means that Brookfield Infrastructure gets to keep more of its DCF to grow its distribution as well as reinvest into its business.
Strong track record of opportunistic acquisitions
Another area of interest is energy infrastructure. With the rerating of many MLPs following a 32% drop in the index year over year, there are a number of good companies that have been dragged down with the tide. In addition, certain E&P companies may have to delever their balance sheets in this new commodity environment by selling midstream assets to focus on their core business. -- Pollock
In addition to a large organic growth project backlog that increased 6% year-over-year to $1.3 billion, Brookfield Infrastructure Partners' management has phenomenal skill at growing through acquisitions of high-quality assets from distressed owners.
Take, for instance, the LP's recent partnering with Kinder Morgan to buy out the rest of Natural Gas Pipeline Company of America LLC for $242 million. In exchange for $106 million, Brookfield Infrastructure will increase its stake in the 9,200-mile pipeline operator to 50%. That's not the only example of Brookfield Infrastructure's use of the oil crash to its benefit. In June it acquired a 40% stake in Niska Gas Partners for $70 million.
Meanwhile, Brookfield Asset Management, thanks to its over 100 years of experience in global infrastructure projects, is also able to find extremely attractive debt investments. For example, Brookfield Infrastructure Partners has a debtor-in-possession loan out to OAS, a large Brazilian construction company that owns a 24% stake in Invepar, a toll road, airport, and urban mobility company. Brookfield plans to use this loan as an inroad to cheaply acquire this equity stake. In the meantime, the terms of the loan guarantee a minimum 15% return in U.S. dollars. Of course the actual return from the loan isn't truly "guaranteed" as there is a risk of company debt default or bankruptcy, especially given Brazil's current economic woes.
Bottom line: Put one of the world's best infrastructure management and acquisition teams to work for you
In my opinion, Brookfield Infrastructure Partners is one of the best, safest way for long-term investors to profit from the current commodity crash and global economic slowdown. With numerous developing national economies as well as energy and mining transportation companies suffering from the commodity meltdown, the opportunities for Brookfield's management to snap up superb assets at favorable prices is likely to drive strong and sustainable distribution growth long into the future.