Brookfield Infrastructure Partners (TSX:BIP.UN) is a stock that has been on a wild ride lately. The stock was the target of a widely read short report back in October of 2023. The short report largely centered around the claim that the company did not actually have the cash flows needed to cover its distributions (‘dividends’). The stock crashed 23% in the weeks following the report’s publication. Since then, the stock has regained all of the ground that it lost in the October crash. In this article, I will explore whether Brookfield Infrastructure Partners is a buy right now, in 2024.
What BIP does
Brookfield Infrastructure Partners is an investment company that invests in assets like:
- Utilities.
- Midstream energy (e.g., pipelines).
- Shipping.
- Data infrastructure (e.g., cell towers, fibre optic cables, data centres).
It’s quite a collection of infrastructure. One attractive feature about this collection of assets is its unique mix of traditional and new asset classes. On the one hand, you have tried-and-true businesses like shipping and utilities. On the other hand, you have data centres, which tie in perfectly with today’s biggest tech trend, namely artificial intelligence (AI). It’s hard to quantify the benefits of having all these kinds of assets, but suffice it to say, BIP’s portfolio is diversified, and the types of assets it invests in are often lucrative to their operators.
What the short report said
In October of 2023, Keith Dalrymple of Dalrymple Finance released a short report about Brookfield, accusing it of:
- Using faulty cash flow metrics.
- Getting more expensive over time.
- Increasing distributions too much.
- Removing financial statement disclosures when they ceased to flatter the company.
I don’t have the time to address Dalrymple’s full 79-page report in detail, but I’d make a few points:
- Dalrymple crticizes BIP’s use of “funds from operations,” which it calculates using a proprietary methodology. It is true that Brookfield’s accountants calculate this method in an unusual way. On the other hand, the company’s cash flow from operations – which is a more standard metric – has grown rapidly.
- Brookfield Infrastructure has shown strong growth in categories that are not easy to manipulate. Revenue has grown ninefold in 10 years. Net income to common shareholders has risen from $-58 million to $338 million. Debt has increased only slightly faster than shareholders’ equity. Certainly Brookfield has a complex structure, but it’s not as if easy-to-understand metrics like revenue and GAAP net income aren’t growing.
There is one definite area where I agree with Dalrymple about BIP: the dividend growth has been much faster than the earnings growth. The payout ratio has been rising over time as a result. This may not be sustainable in the long run but slowing down the dividend growth would not be hard to do if a situation required it.
The bottom line
The bottom line on Brookfield Infrastructure Partners is that it’s an impressively run company with a lot of great assets. Is it the kind of stock I’d go out and buy at a huge portfolio weighting? Probably not. But at a small weighting in a diversified portfolio, it makes some sense.
