Source: Brookfield Infrastructure Partners.
Growing concerns about a slowdown in China and oil prices that have crashed to 13-year lows have combined to generate the worst start to the year in market history. Yet long-term investors know that this isn't a reason to panic and sell, but rather to load up on some great, high-quality dividend stocks. Take for example, Brookfield Infrastructure Partners (BIP +0.98%).
Down about 20% over just the past few months, I'm convinced that this world-class, best-in-breed diversified utility could be just the thing to help dividend investors lock in some fantastic long-term, market crushing returns over the next five to 10 years.
Let's examine three reasons Brookfield Infrastructure deserves to be on every income investor's radar, and probably in your diversified income portfolio as well.
Business models don't come much better than this
Source: Brookfield Infrastructure Partners.
Few utilities are as diversified as Brookfield Infrastructure Partners, which operates in four different utility segments on five continents, after recently announcing its first investment into Indian toll roads.
Better yet, the adjusted cash flow from operations (AFFO) that funds the quarterly distribution is extremely predictable and stable. That's because 90% of it comes from assets either operating in highly regulated industries or under long-term contracts, 70% of which are indexed to inflation.
Payout not just sustainable, but likely to grow as well
Source: Brookfield Infrastructure Partners investor presentation.
Utilities are a favorite among income investors because of their high yields, with an industry average of 4%. Brookfield far surpasses that with its 6.5% yield, but dividend investors need to focus not just on the current payout, but also on the two other components of a distribution profile: sustainability and long-term growth potential.
That's why I love Brookfield Infrastructure's conservative payout principle of growing the distribution slower than funds from operation per share as well as AFFO. This approach does two things.
First, it results in a highly sustainable payout. For example, through the first three quarters of 2015 Brookfield Infrastructure has paid out 69.7% of AFFO per unit as distributions. It also creates growing excess cash ($205 million on an annualized basis) that can not only support modest distribution growth but can also be reinvested into the partnership's backlog of organic growth projects, which stands at $1.3 billion of growth investment opportunities over the next two to three years.
When combined with the nearly $1.1 billion in cash Brookfield Infrastructure has on its balance sheet, the partnership can fund its entire organic backlog without needing to tap the debt or equity markets. Instead, Brookfield Infrastructure can save these two forms of growth capital funding for major acquisitions.
Such deals, put together by Brookfield Asset Management (BAM +0.27%), the partnership's sponsor and general partner, are one of the biggest reasons I consider Brookfield Infrastructure Partners a true "buy and hold forever" utility.
Commodity crash is a fantastic growth opportunity for Brookfield
Brookfield Asset Management is one of the world's oldest and largest infrastructure, real estate, renewable energy, and private equity managers. It's over 100 years old and has $225 billion in assets under management.
This expertise and scale let Brookfield Asset Management find highly profitable deals for Brookfield Infrastructure to invest in, especially during times when crashing commodity prices and economic distress put quality assets in places such as Brazil, Europe, or Australia on sale.
Risks to be aware of
No matter how great an investment is, no stock is without some risks. For Brookfield Infrastructure I see two major short- to medium-term threats.
First, many of its key markets, especially in South America, are commodity-dependent, developing economies. With 40% of its cash flows exposed to potential volume risk, should commodity prices remain very low for several years, there is a chance that Brookfield's AFFO could take a hit large enough to make management's payout growth guidance of 5% to 9% CAGR no longer feasible.
Second, rising interest rates could potentially hurt the profitability of the partnership's future growth projects. There is a chance that rising interest rates in the years to come could make future acquisitions less accretive than those that have propelled Brookfield Infrastructure's impressive growth thus far.
Bottom line
Given its wide-moat business model, cash flow-rich assets, the quality of its management, and exceptional long-term growth prospects, I believe that Brookfield Infrastructure Trust will make an excellent dividend growth investment over the next five to 10 years.
Even with the risk of recession in some of its key markets, given the low AFFO payout ratio, the current 6.5% yield represents a substantial mispricing of this partnership. By investing at today's highly undervalued levels, you can set up your portfolio for substantial capital gains when Wall Street realizes its mistake.
