Valued at $1.9 billion by market cap, Brookfield Business Partners (TSX:BBU.UN) has trailed the broader markets by a wide margin since its IPO (initial public offering) in June 2016. In the last eight years, the TSX stock has returned just 22%, trailing flagship indices such as the S&P 500, which has gained over 160% in this period.
Brookfield Business Partners stock trades 57% below all-time highs, allowing you to buy the dip and benefit from outsized gains when market sentiment recovers. Let’s see if this TSX dividend stock should be part of your portfolio in July 2024.
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An overview of Brookfield Business Partners
Brookfield Business Partners is a global business services and industrial company focused on owning and operating quality assets. Its operations are diversified across the industrial, infrastructure services, and business services sectors.
Brookfield Business has the flexibility to invest across multiple industries. It acquires quality businesses and applies its global investing and operational expertise to create value by focusing on profitability and sustainable cash flows.
A solid performance in Q1 of 2024
Brookfield Business reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of US$544 million in Q1, increasing its margin to more than 20%. The company emphasized that its portfolio of high-quality businesses is a key differentiator of earnings quality across market cycles.
Moreover, in Q1, it generated US$300 million from capital-recycling initiatives, which includes the sale of two smaller operations. To date, Brookfield Business has monetized 20 businesses and generated US$6 billion of proceeds, realizing a three times multiple on these investments and a composite IRR (internal rate of return) of 30%.
Its strong business fundamentals enable Brookfield Business to access capital at favourable rates. Its work access services operations recently repriced a US$1.3 billion term loan. Additionally, higher earnings from operations allow the company to prudently upfinance borrowings and fund distributions.
Is the TSX dividend stock undervalued?
Brookfield Business’s underperformance is confusing, as it has increased adjusted EBITDA from US$240 million in 2016 to US$2.4 billion in the last 12 months, indicating an annual growth rate of 37%. In this period, its EBITDA margin has improved from 4% to 20%. Brookfield Business reported earnings from operations per share of US$4.03 in the last four quarters, up from US$1.30 per share in 2016.
It suggests that Brookfield Business stock is really cheap at just six times forward earnings. The company also pays shareholders an annual dividend of US$0.25 per share, indicating a yield of 1.4%. These quarterly payouts have risen from US$0.04 per share to US$0.063 per share in the last nine years.
Brookfield Business has a strong and flexible balance sheet to support future growth. It ended Q1 with US$1.6 billion in total liquidity, which includes cash, investments, and corporate credit facilities. Around 75% of its borrowings are fixed or hedged through derivatives, with a weighted average borrowing cost of 7.8%.
Analysts remain bullish on Brookfield Business due to its strong cash flow growth and enticing valuation. According to consensus price target estimates, the top TSX stock trades at a discount of 60% right now.
