Article Thesis
Brookfield Infrastructure Partners (NYSE:BIP) (NYSE:BIPC) is a well-managed, high-quality company that offers an attractive combination of dividends and growth potential. Following a substantial share price decline over the last year, the company is now trading at a highly attractive valuation, I believe, making for a compelling buying opportunity for long-term oriented investors seeking a dividend growth or total return investment.
Past Coverage
I have written about Brookfield Infrastructure Partners in the past here on Seeking Alpha. My most recent article is from April 2023, in which I focused on the deal between Brookfield Infrastructure Partners and Triton International Limited. With more than a year having passed since that article was published, and with BIP declining since then, making shares more attractively valued, it is time to take another look at this member of the Brookfield empire.
BIP: Benefitting From All Kinds Of Macro Trends
The Brookfield empire, headed by Brookfield Corporation (BN) offers exposure to different macro trends. Brookfield Renewable Partners (BEP) (BEPC) gives investors exposure to the green energy trend, while Brookfield Asset Management (BAM) gives investors exposure to the (alternative) asset management industry. As the name suggests, Brookfield Infrastructure Partners is focused on infrastructure assets — when we delve into the details, we see that BIP gives investors exposure to several important macro themes that will shape the coming years and decades. The types of assets Brookfield Infrastructure Partners invests in can be seen in the following slide from the company’s recent investor presentation:
Transport is the largest asset type, at around two-fifths of the company-wide asset base. But one could argue that the company’s midstream assets are used for transportation as well, although BIP’s management decided to differentiate between energy transportation and transportation of goods and non-energy commodities via trains, ships, and so on.
Utilities are another important business unit for BIP, and, again, one could argue that the utilities business offers some transportation services as well — after all, utilities transport electrical energy to their customers.
The data business is the smallest business unit for now but has one of the best growth outlooks. After all, the ongoing AI trend means that more and more data is being collected, processed, and stored. Training a self-driving system, for example, requires massive loads of data that need to be transmitted from the vehicle to the data centers where it is being processed. Once self-driving vehicle tech is being rolled out, vehicles also need to communicate with each other, which requires high-powered data transmission infrastructure as well.
AI data centers are not only good for BIP’s data business, however, as they are also driving electricity demand. More electricity being required means that more electricity needs to be transported, which is good for BIP’s utilities business. And more electricity being needed also means that more electricity needs to be produced, which should drive demand for natural gas — as natural gas is a cheap and reliable source of electric power that is independent of weather conditions. Higher natural gas demand due to growing electricity demand should, in turn, be positive for Brookfield Infrastructure Partners’ midstream business, as all the additional natural gas that is needed needs to be gathered, stored, and transported.
Brookfield Infrastructure Partners thus should benefit substantially from the current AI trend, even though it is not an obvious beneficiary at first sight. The same could be said about other utilities, energy midstream companies, and so on.
With Brookfield Infrastructure Partners benefitting from growing electricity demand and growing natural gas demand, the company could also benefit from the growing EV market. More EVs mean more electricity demand, all else equal, which should be positive for BIP’s utilities segment. And since electricity is needed throughout the year, no matter what the weather looks like, more EVs could also result in more natural gas being burned to generate electric power, which should be good for BIP’s midstream business. Likewise, replacing coal power plants with natural gas power plants in order to bring down emissions — burning natural gas generates less CO2 — is good for the midstream business as well.
With BIP being a beneficiary of AI, self-driving vehicle tech, EVs, and so on, the company is thus, I believe, well-positioned to do well in the coming years and decades. Its businesses may look somewhat “boring” at first sight, but it provides the infrastructure backbones for several important trends.
At the same time, the company is very well-managed, which is clearly visible when we take a look at BIP’s excellent track record:
The company has grown its funds from operations at a mid-teens growth rate (per share) over the last 15 years, which is, I believe, excellent. Going forward, growth will likely be somewhat lower — keeping a high relative growth rate in place gets harder as a company grows in size — but management believes that funds from operations per share should grow by at least 10% per year going forward, too.
This growth will be driven by contributing factors such as inflation escalators, organic growth investments, margin improvement, and M&A. A large portion of BIP’s revenues are inflation-linked, meaning the fees the company receives, e.g. for transporting natural gas, grow as inflation rises. This means that the revenues that BIP generates from its existing asset base will grow in the long run, even if the assets themselves do not change at all. Brookfield Infrastructure Partners also invests in new assets, both by building out new assets and by acquiring existing assets (or entire companies). Recently, the company has, for example, acquired almost 80,000 telecom sites in India. This increases BIP’s exposure to the Indian market, which is positive, as India has one of the best GDP growth rates in the world (8% in 2023).
When BIP acquires assets, it always tries to optimize them, either by driving down costs or by increasing revenues, e.g. by integrating them with other assets they own. This results in some margin growth in the long run, which also benefits BIP’s FFO per share growth. While there is no guarantee that BIP will achieve its 10%+ annual growth goal, I believe that there is a good chance that the company will hit this target. The company’s track record proves that the company is able to drive strong growth with its business model, and tailwinds such as a growing need for data centers, electricity, and so on should be beneficial as well.
Brookfield Infrastructure Partners: Attractively Priced
But the good news is that FFO per share growth of 10% and more per year wouldn’t even be necessary for Brookfield Infrastructure Partners to be a good investment today. In fact, I believe that even a 5% FFO per share growth rate would make for a solid investment — and that is just one-third of the historic growth rate.
After all, total returns do not solely rely on earnings per share or FFO per share growth. Dividends are a total return driver as well, and Brookfield Infrastructure Partners currently offers a very appealing dividend yield of 5.5%. If Brookfield Infrastructure Partners were to grow its FFO per share by just 5% going forward — just half of the lower end of management’s guidance — and if the dividend payout ratio is held stable, then BIP would offer a 5.5% dividend yield with 5% annual dividend growth. Total returns in the 10% to 11% range would be relatively realistic in such a scenario. If BIP is able to grow its FFO per share by 10% per year going forward, the total return outlook naturally is significantly better.
Today, Brookfield Infrastructure Partners trades at just below 10x forward FFO, which pencils out to an FFO yield of just above 10%. This would be very reasonable for a company with no FFO growth or a low FFO growth rate, but for a company that aims for 10% annual FFO growth — and that has done even better in the past — that is a pretty low valuation, I believe. There could thus also be some valuation upside for someone buying here.
Inflation numbers in the US just came in lower than expected, which means that there is a good chance for interest rate cuts later this year. If interest rates decline, dividend stocks become more attractive, all else equal. I would not be surprised to see investors become more interested in dividend growth stocks such as Brookfield Infrastructure Partners over the coming year or so, as declining interest rates could make them shift money from money market funds and treasuries to dividend growth investments. REITs, utilities, and so on could benefit from that as well.
All in all, investors currently have the opportunity to buy a well-managed infrastructure player that will benefit from several macro trends at a very undemanding valuation, locking in a nice yield and substantial long-term growth potential.
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