Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) is a leading global infrastructure company that’s great for income and long-term growth. It has had a nice run, rising 30% in the past 12 months.
Quality business and investment
Brookfield Infrastructure is a well-run business that owns and operates high-quality, long-life assets in the utilities, transport, energy and communications infrastructure sectors across North and South America, Asia Pacific, and Europe.
Brookfield Asset Management is Brookfield Infrastructure’s general partner and manager; it has about 30% equity interest in the company. So, management’s interests are aligned with unitholders’.
Brookfield Infrastructure intends to pay out 60-70% of its funds from operations (FFO) as distributions, while retaining sufficient FFO to maintain and grow the business. The current payout ratio is 66%.
Since inception, the stock has greatly outperformed the market. If you’d reinvested its distributions, you would have achieved returns of at least 20% per year.
This performance matches its FFO-per-unit growth of 23% on average per year from 2009 to 2015. Since 2009 Brookfield Infrastructure has also increased its distribution per unit at 12% per unit on average per year. The company foresees its FFO growth to support a distribution growth of 5-9% per year.
Growing sector
Infrastructure is a large and growing sector. Governments around the world in both developed and emerging markets are supportive of infrastructure investments. However, governments have fiscal budget constraints, and that’s where Brookfield Infrastructure comes in.
For example, the United States is estimated to have a funding gap for infrastructure investment of US$3.6 trillion by 2020, Europe is estimated to have a funding gap of EUR$1 trillion by 2018, and Canada is estimated to have a funding gap of $200 billion by 2025.
What will happen after the split?
Brookfield Infrastructure’s units popped up more than 3% on Thursday after the company had a three-for-two unit split. This split results in more units on the market, which increases the liquidity of the stock.
Usually, companies do this after the share price has appreciated to a certain level, and it’s an indication that the company is doing well. The split also results in the units trading at a lower price. So, it gives the illusion that the units are cheaper when they’re not.
Investors should carefully interpret the information they use for companies that have just had a split. For example, a prominent website that provides financial data presents Brookfield Infrastructure’s 52-week range as $42-65, which would make the roughly $43 per unit look cheap. However, the 52-week range should really be $28-43 to be meaningful.
With regards to its distribution, Brookfield Infrastructure’s web page also hasn’t been updated yet. It indicates a quarterly distribution per share of US$0.59 per unit, but it should really be US$0.39 per unit after the split.
Conclusion
In its August presentation, Brookfield Infrastructure believed it was worth about US$59 per unit, which is a post-split price of US$39.33 per unit. This implies the units are discounted by about 16% and is considered undervalued despite the 3% pop.
Brookfield Infrastructure yields nearly 4.8%. It’s a quality company for income and growth and would especially be a great buy if it yields more than 5%.
