Brookfield Infrastructure(NYSE: BIPC) (NYSE: BIP) has been a great dividend stock since its formation 15 years ago. The global infrastructure operator has increased its payout every year, growing it at a robust 9% compound annual rate. That has given it the fuel to create tremendous value for investors over the years, with early shareholders earning a 6.6x return on their initial investment.
Many investors would likely jump at the chance to go back in time so they could buy shares at its launch. The good news is that you don't have to time travel because Brookfield Infrastructure currently trades at a historically cheap valuation multiple. Even better, its future growth prospects are stronger than ever. That makes right now an ideal time to start a position or add to an existing one.
A historically cheap stock
When Brookfield Infrastructure came public 15 years ago, it traded at about 15.5 times its adjusted funds from operations (FFO). Over the last 10 years, it has traded at an average of 16x its price-to-adjusted FFO, with its valuation higher over the last five years (16.5x).
However, its valuation has fallen in recent years, mainly due to the impact higher interest rates have on companies with a high dividend yield, like utilities. Higher rates make alternative income-generating investments like government bonds more attractive.
As a result, the valuations of yield-focused vehicles tend to fall, driving up their dividend yields to entice income-focused investors. We've seen this in Brookfield's valuation multiple, which has fallen to a historically cheap 14.4x today.
That valuation is even more attractive when compared to other utility-like companies. Brookfield Infrastructure currently offers a higher dividend yield (around 5%, compared to roughly 3% for the average utility) even though it expects to grow its payout faster (5%-9% annual target versus the roughly 4% projected average growth rate of that sector). Brookfield also has a lower risk profile (more diversification than utilities and less exposure to the more volatile consumer sector).
Gale-force tailwinds
Brookfield Infrastructure has grown briskly over the years by expanding into additional infrastructure platforms to capitalize on three global investment megatrends: decarbonization, deglobalization, and digitalization. These catalysts have helped fuel 15% compound annual FFO-per-share growth since its formation. It has benefited from strong organic growth drivers and its asset rotation strategy to pivot its portfolio to better capitalize on the three "D" megatrends.
That strategy should pay big dividends in the coming years, due in part to the digitalization trend vastly surpassing its wildest expectations. The emergence of AI has broader implications for its business than it anticipated. Because of that, the overall trend will require a tremendous amount of investment capital to upgrade and grow the infrastructure needed to support this technology. That's providing a deep opportunity set of potential investments that has vastly exceeded its expectations.
Roughly 60% of the company's business should benefit from the digitalization megatrend. That's because energy and data are interconnected. The global economy will need a tremendous amount of electricity to power data centers and transmit data.
That feeds into the company's ecosystem. It operates midstream infrastructure that supplies natural gas to utilities. The company also operates utilities that will need to deliver more energy to customers in the future. In addition, Brookfield owns and develops digital infrastructure like data centers, cell towers, and fiber optic networks, which arecrucial to the digital age.
These factors drive the company's view that its current portfolio is more valuable than it initially assumed. Meanwhile, its investment opportunity set is massive, far exceeding its previous expectations. That leads the company to believe the future could be even better than the past.
An incredible opportunity
Brookfield Infrastructure trades at a historically low valuation multiple these days. That discount is completely unwarranted. The company's growth tailwinds have never been stronger, which should enable it to grow its earnings briskly while increasing its high-yielding dividend at an above-average rate.
Add in the potential for a valuation boost, and Brookfield Infrastructure could produce tremendous total returns in the coming years. That makes it look like a screaming buy right now.
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Matt DiLallo has positions in Brookfield Infrastructure Corporation and Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
