Utilities are one of the cornerstones of high-yield portfolios and for good reason.

Their generally stable and predictable cash flows, often protected by regulated prices, result in most utilities achieving high Dividend Safety Scores.

Safe payouts can be a major asset for low risk investors – especially retirees who depend on dividends for funding their living expenses.

However, not all utilities require one to sacrifice growth for a safe, high yield.

One global utility in particular, Brookfield Infrastructure Partners (BIP), appears to have a long runway for income growth.

Let’s take a closer look at Brookfield Infrastructure Partners for consideration in our Conservative Retirees dividend portfolio.

Business Overview

Brookfield Infrastructure Partners is one of the fastest growing and most diversified utilities in the world.

In fact, the limited partnership (a corporate structure similar to that of a Master Limited Partnership, or MLP) owns 32 infrastructure assets consisting of:

  • 2.8 million natural gas and electricity connections
  • 11,200 km of electrical transmission lines
  • 9,900 km of railroads
  • 3,600 km of toll roads
  • 36 global ports
  • 15,000 km of natural gas pipelines
  • 600 billion cubic feet of natural gas storage
  • 7,000 telecom towers
  • 5,000 km of fiber optic lines

As Brookfield points out, it essentially owns “critical and diverse infrastructure networks over which energy, water, goods, people and data flow or are stored.”

Brookfield Infrastructure Partners

Source: Brookfield Infrastructure Partners Investor Presentation

Brookfield Infrastructure Partners’ healthy diversification by business segment (no business unit is more than 20% of cash flow) and geography helps to ensure very stable cash flows to secure the safety and growth of its distribution (a tax deferred form of dividend).

That’s especially true since 91% of the company’s cash flow is secured by either long-term, fixed rate contracts (with annual inflation adjustments) or is derived in regulated industries.

Brookfield Infrastructure’s global reach also provides it with one of the stronger growth runways of any utility.

Business Analysis

The key to Brookfield Infrastructure’s success is its sponsor, general partner, and manager, Brookfield Asset Management (BAM). BAM is the world’s premier utility, infrastructure, and real estate asset manager.

In fact, with over 115 years of experience and $250 billion in assets under management, Brookfield Asset Management is the world’s most experienced, trusted, and largest hard asset manager in the world.

Here’s how it works.

Brookfield Asset Management’s 55,000 employees (operating in over 30 countries) scour the world for attractive investment opportunities in infrastructure and utilities. That includes undervalued cash rich assets located in troubled economies such as Latin America and Europe.

BIP and BAM have a symbiotic relationship in which BAM uses its world class expertise in utilities and infrastructure to make highly profitable deals for BIP, which raises debt and equity capital from investors to pay for these high-quality, wide moat assets.

In exchange, BAM gets a 1.25% annual base management fee, as well as 25% of marginal funds from operations (from incentive distribution rights, or IDRs), plus the 30% of BIP’s fast-growing distribution (courtesy of BAM’s 30% equity stake in the LP).

Brookfield Infrastructure Partners

Source: Brookfield Asset Management Investor Presentation

BAM uses its enormous financial resources to acquire assets at attractive prices, resulting in very high cash yields for investors.

These assets are then sold (i.e. “dropped down”) to Brookfield Infrastructure Partners, which gains long-term, secured cash flows with which to grow its distribution at management’s long-term goal of 5% to 9%. It also helps the company in pursue its target long-term total returns of 12% to 15% per year.

Brookfield Infrastructure Partners

The result has been nothing less than spectacular for Brookfield Infrastructure unit holders, with BIP more than doubling the market’s total return since its IPO in 2008.

However, while past performance is no guarantee of future results, investors have numerous reasons to expect Brookfield Infrastructure to continue its strong growth.

For one thing, as Brookfield Infrastructure has continued to exceed management’s long-term growth guidance, the LP’s access to cheap debt and equity capital has only increased. This allowed it to make a record number of deals in 2016, totaling $850 million.

Brookfield Infrastructure Partners

That allowed BIP to generate sensational (for a utility) top line growth of 14% last year. But more importantly, its adjusted funds from operations, or AFFO per unit (equivalent of free cash flow), grew 11.5% and allowed management to hike the dividend twice while retaining a secure AFFO payout ratio of 78%.

Brookfield Infrastructure Partners

Source: Earnings Release

Brookfield Infrastructure Partners plans to invest $1.4 billion over the next two years into its organic growth pipeline, which means expansion of assets it already owns.

In other words, even if new investment opportunities continue to dry up, Brookfield Infrastructure should still maintain steady growth in its AFFO, and thus its payout.

Brookfield Infrastructure Partners

However, even with continued recessions in certain key markets, especially Latin America (due to a commodity crash hurting the continent’s export dominated economies), Brookfield’s new acquisition pipeline remains as robust as ever.

In fact, management is currently working on $2.4 billion in new deals, which would make 2017 the largest growth year yet for Brookfield Infrastructure.

Of course, as we’ve seen with other fast-growing infrastructure companies, such as Kinder Morgan (KMI), a large growth backlog means nothing if a company lacks the liquidity to execute on it.

Fortunately that’s not the case with Brookfield Infrastructure Partners, whose relationship with BAM, as well as its world class track record for highly profitable deals and fast payout growth, ensures strong access to growth capital.

In fact, Brookfield Infrastructure Partners has $4 billion in current liquidity, and its access to equity capital is even greater thanks to management’s solid track record for superior capital management.

Specifically, BIP will periodically recycle capital, meaning selling assets when they become overvalued, in order to redeploy capital into more undervalued assets.

For example, in the last eight years management has sold 8 businesses for $2 billion and generated 25% internal rates of return.

It’s currently planning a similar $1.5 billion to $2 billion in asset sales to help fund its growth opportunities as it attempts to become ever more profitable over time.

Brookfield Infrastructure Partners

Overall, Brookfield Infrastructure runs an attractive business that benefits from healthy customer, end market, and geographical diversification, as well as ownership of hard-to-replicate assets. Replacing the company’s hard assets would be extremely costly, and many of them are further protected by regulatory and legislative operating permits. The non-discretionary nature of their services is also attractive, and only so many infrastructure assets are needed in any particular location, further raising barriers to entry.

Key Risks

While Brookfield Infrastructure Partners shares elements with other great long-term income growth stocks, there are nonetheless several risk factors to keep in mind.

First, because it operates overseas, unlike most U.S. utilities, BIP has significant exposure to fluctuating currency risk. More specifically, the U.S. dollar is up 26% in the last two years and now sits at 15-year highs.

This means that when BIP converts the local currencies in which its businesses operate

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