If you’ve followed my model Yield Hog Dividend Growth Portfolio, you’ll know that I’m a big fan of Brookfield Infrastructure Partners LP BIP-UN-T.
Shares of the global infrastructure giant have performed exceptionally well. For the past five years through Feb. 16, they posted an annualized total return of 14 per cent, handily beating the S&P/TSX Composite Index’s annualized total return of about 9 per cent over the same period. (Total returns assume all dividends were reinvested.)
And I believe there is more to come. That’s why, today, I’m announcing the purchase of an additional 10 units of BIP.UN with the “cash” in my model dividend portfolio, bringing my total to 132 units.
The money in my model portfolio isn’t real, but I hold BIP.UN units personally as well. I also own Brookfield Infrastructure Corp. BIPC-T shares, which, unlike the limited partnership units, qualify for the dividend tax credit.
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Here’s why I consider Brookfield Infrastructure to be a core holding:
It has its tentacles in everything
Brookfield Infrastructure invests in businesses around the globe that form the backbone of the economy, including electric and gas utilities, railroads, ports, toll roads, pipelines and natural gas storage facilities. Its operations are diversified geographically, with a focus on North America, South America, Europe, India and Australia. Lest you think the company is some old-economy dinosaur, it also has a growing foothold in the digital economy through its ownership of telecom towers, fibre-optic lines and data storage centres. Infrastructure assets are big-moat businesses with high barriers to entry and, because they are essential to the economy, they generate steady cash flows in good times and bad.
Its distribution/dividend keeps growing
When Brookfield Infrastructure reported fourth-quarter results on Feb. 2, it raised its quarterly payout by 6 per cent to 54 US cents a unit, or US$2.16 annually. (BIP.UN’s distribution and BIPC’s dividend have the same dollar value, but they are treated differently for tax purposes.) The company has raised its distribution annually for more than a decade, and that will almost certainly continue given its policy of targeting dividend increases of 5 per cent to 9 per cent annually.
The current yield is also attractive. BIP.UN’s units yield about 3.6 per cent, while the higher-priced BIPC shares yield about 3.2 per cent. The difference in yield reflects the fact that BIPC posted a higher return than BIP.UN after BIPC was spun out as a separate security in March, 2020. However, in the past year the tables have reversed and BIP.UN has been the clear winner. Which one is the better bet now? Who knows? My solution is to invest in both (although in a non-registered account BIPC may be preferable because of the dividend tax credit and more straightforward accounting.)
It provides a hedge against inflation
This week, we learned that inflation hit a 30-year high of 5.1 per cent in January. Well, here’s one way to fight back. In its fourth-quarter letter to shareholders, Brookfield Infrastructure pointed out that “higher inflation is favourable for stable infrastructure businesses like ours.” Specifically, about 70 per cent of its revenues are indexed to local inflation, with that number climbing to between 80 per cent and 90 per cent for its utilities, transportation and data assets. What’s more, many of the company’s midstream energy businesses include inflation escalators or stand to benefit from higher commodity prices. “With core infrastructure largely consisting of fixed costs, BIP is poised to benefit from revenues being indexed to inflation in the year ahead as well as the compounding effect of heightened inflation across multiple years,” said Robert Kwan, an analyst with RBC Dominion Securities, in a recent note.
(Note: BIP is the stock symbol for Brookfield Infrastructure Partners LP on the New York Stock Exchange, while BIP.UN is its symbol on the Toronto Stock Exchange. BIPC is the symbol for Brookfield Infrastructure Corp. on both exchanges.)
The growth runway is long
Brookfield Infrastructure is coming off a year in which it deployed more than US$3-billion of equity capital, posted record results and raised about US$5-billion of equity from share issues and asset sales. “These initiatives position BIP extremely well to deliver record financial results again in 2022, while maintaining a solid balance sheet and liquidity position to fund new growth,” said Naji Baydoun, an analyst with iA Capital Markets, in a note. Mr. Baydoun said the company has already secured more than US$715-million of mergers and acquisitions opportunities for 2022, including two utility deals in Australia. “We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context,” he said.
Analysts are bullish
Among the 12 analysts who follow BIP.UN/BIP, there are 10 buy or equivalent ratings, two holds and no sells. The average price target is US$67.36, representing a 12.7-per-cent premium to BIP’s Friday closing price of US$59.76 on the NYSE. Price targets should be taken with a grain of salt, but when there is such a strong consensus about the outlook for a company, it’s often a bullish sign. I have no idea what will happen to BIP.UN’s or BIPC’s share price in the short term, but over the long run this global infrastructure play will almost certainly deliver rising dividends and capital growth for patient investors.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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