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In Focus: Brookfield Infrastructure (BIP / BIPC)

By The Dividend Monk Leave a Comment

In focus this week is Brookfield Infrastructure (BIP / BIPC), one of the largest owners and operators of critical global infrastructure networks. BIP assets facilitate the movement and storage of energy, water, freight, passengers, and data. It’s part of the Brookfield family of companies.

The company’s stated objectives are to: 1) generate a long-term return of 12 -15% on equity, and 2) provide sustainable distributions for unitholders while targeting annual distribution growth of 5-9%. Brookfield Corporation (BN) owns 27% of Brookfield Infrastructure.

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Brookfield infrastructure (BIP / BIPC) business

BIP has built an impressive infrastructure portfolio through four business segments: Utilities contribute about 26% of its funds from operations (FFO), Transport 41%, Midstream 23%, and Data Infrastructure 9%.

Utilities

  • 1M electricity and gas connections.
  • 4,200 km of natural gas pipelines.
  • 2,900km of electricity transmission lines.
  • 7M residential energy customers.

Transport

  • 37,300 km of rail operations.
  • 3,300 km of toll roads.
  • 7M twenty-foot equivalent unit intermodal containers.
  • 10 terminals and 2 export facilities.

Midstream

  • 15,000 km of transmission pipeline.
  • 570 billion cubic feet (bcf) of natural gas storage.
  • 10,600km of natural gas gathering pipelines.
  • 17 natural gas liquids processing plants.

Data Infrastructure

  • 228,000 multipurpose towers and active rooftop sites.
  • 54,000km of fiber optic cable. 2 semiconductor manufacturing foundries.
  • 1,000,000 fiber-to-the-premise connections.
  • 135 data centers.

The company is well diversified geographically with operations in the Americas (69% of assets), Asia Pacific (14%), and Europe (17%).

Brookfield Infrastructure logoBIP provided extra information on its debt structure in its Q4 2023 presentation in February 2024. BIP has a credit rating of S&P 500 BBB+ with an average debt term maturity of 7 years. The company has $2.8B in liquidity and only 5% of Brookfield Infrastructure’s debt is up for renewal over the next 12 months.

BIP is currently actively investing in its data infrastructure (35% of its CAPEX) and transport business (46%).

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BIP investing narrative

A disadvantage most utilities have is a lack of diversification. Many of them excel at a specific type of service (electric transmission, natural gas, etc.) and show a limited geographic footprint. BIP breaks both patterns; it operates in multiple business segments and manages assets across the world. We also like its ability to be proactive with massive investments in data infrastructure.

Brookfield has ample liquidity and no significant debt maturities in the next 5 years; it is also backed by Brookfield Corporation (BN). The company offers a stable business model based on predictable cash flows with inflation-indexed contracts. This is how BIP can report stable growth, even in challenging times.

In 2023, BIP announced the acquisition of Triton International for $13.3B. Triton is the world’s largest owner and lessor of intermodal containers and a critical provider of transportation logistics infrastructure supporting global supply chains.

Brookfield infrastructure (BIP / BIPC) dividend triangle

Below is a graph showing BIP’s stock price over the last five years and the evolution of its revenue, Funds from Operations (FFO) per share, and dividend payments.

Graphs of Brookfield infrastructure's stock price, revenue, FFO per share, and dividend over 5 years

We show the FFO per share rather than earnings per share (EPS) because BIP has massive capital expenditures (CAPEX) and large assets. This means that its financial statements are always affected by large non-cash charges such as amortization and fair value modifications (up or down). Non-cash charges affect earnings per share, but not the company’s cash flow. Funds from operations (FFO) calculations add these non-charges back, giving a more accurate picture of the company’s cash situation. That’s the case with many other companies, including Brookfield Renewable Partners (BEP).

Seeing BIP with negative EPS while it’s raising its dividend is confusing, to say the least; why would a company increase its dividends when it is losing money? Because BIP generates constant cash flow from its assets; this is visible in the funds from operations, but not in EPS which has all non-cash charges subtracted.

The cash flow from the assets is well protected against inflation. In Q1’24, BIP confirmed 11% FFO growth, of which 7% was organic growth and an 8.3% increase in its FFO per share. Growth was driven by the Transport segment, with contributions from the Triton acquisition, inflationary tariff increases,  and higher volumes.

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Potential risks

BIP continues to show interest in new projects that require billions. It is taking on a lot of debt to finance them. The company now has a total long-term debt of $43B USD, up from $10B in 2018. Total long-term debt remained stable in 2022 but increased again since mid-2023. This could become a problem with current high interest rates not likely to go down a lot any time soon.

Graph of the evolution of BIP's long term debt, standing at $43B USD in 2024.

Another source of concern is its diversification. Diversification is often positive, but BIP is managing a wide range of varied business types; there are few similarities between data centers and railroads. Could BIP lose itself in this maze of disparate ventures?

BIP’s financial structure makes it difficult to analyze. There are blind spots as we can’t review each business operated by BIP. We must trust management in thief FFO calculation since it’s not a GAAP measure.

Partner, trusts, and corporate shares?

In 2020, Brookfield created new types of shares in BIP. Historically, it was trading under a Trust in Canada or a Limited Partnership (LP) in the U.S. We’ll skip the tax implications here because a) I hate taxes and b) I leave this field of knowledge to accountants and tax experts.

In short, Trust and LP distributions are taxed differently in a taxable account than corporate shares. Therefore, they are usually less popular among retail investors, ETFs, and mutual funds due to their tax complexity. To ensure more flexibility and liquidity, and appeal to U.S. investors, Brookfield created corporate This created much confusion at first because Brookfield Infrastructure now has 3-4 different tickers per company:

Share Type Ticker Symbol
Limited Partnership (LP) BIP
Corp. (U.S.) BIPC
Trust (CDN) BIP.UN.TO
Corp. (CDN) BIPC.TO

 

All entities are economically equivalent. However, there was an important difference between the performance of the new “C” shares vs the old tickers following their inception. The difference is explained by the unexpected level of interest in the corporate shares, particularly from institutional investors who usually don’t buy limited partners or trust units for tax purposes. As demand increased for the corporate shares, C shares appreciated faster than the trust and LP units. Now that the initial hype is gone, both tickers (which pay the same dividend) seem to move similarly. However, chances are if there is another influx of funds to buy BIPC shares, the corporate class may get more of that influx.

In closing

BIP is a mixed bag of various utility businesses; it’s almost a utility ETF! It can count on projects across the world, with rock-solid contracts that perpetuate their growth.

Brookfield Infrastructure has a strong dividend history over the past decade. I appreciate their FFO payout ratio target of 60-70%, leaving lots of room for business growth on top of dividend growth. Combine this with management’s confidence in being able to maintain a 5%-9% distribution increase policy for years, this is clearly a “go-to” stock if an investor is looking for income.

 

BIP! BEP! BAM! Explaining the Brookfield Companies

By The Dividend Monk 1 Comment

No, this isn’t a Batman adventure, but rather a post explaining the Brookfield companies. Brookfield Corporation is huge. With over 180,000 employees in 30+ countries, it manages more than $750B in assets invested in its various businesses. Brookfield companies operate in different industries, for example, asset management, renewable energy, reinsurance, and infrastructure (with tickers including BIP, BEP, BAM, etc.). They can be great investments, as long as you understand which is which!

Many investors have been excited about Brookfield’s diversification, its smart business model, and its ability to thrive for more than a century while paying generous dividends and providing excellent total returns. Others turned away due to Brookfield’s complex structure.

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Why so complex?

Starting as the San Paolo Tramway, Light and Power Company in 1899, the company has diversified into new activities. Along the way, it spun off these new business segments as separate companies. The mothership, the parent company now called Brookfield Corporation, owns part of or all of these Brookfield family companies. Investors can buy stock in any of the Brookfield companies that are publicly traded, or buy shares of the parent, Brookfield Corporation, which itself owns a piece of all the others.

What Brookfield does

Brookfield Corp. (BN) is an alternative asset manager. It focuses on what’s called alternative assets rather than classic assets such as equities (stocks), fixed income (bonds, preferred shares), or cash (money market funds). Alternative assets are long-life, high-quality assets including hydroelectricity plants, wind and solar farms, toll roads, pipelines, railroads, data centers, healthcare facilities, etc.

Brookfield companies

Brookfield expertise

Investing and managing alternative assets requires unique expertise. While each Brookfield company operates in different industries, they all share many characteristics. Most of their projects and investments:

  • Are large and complex.
  • Require patient money, i.e., money must remain invested for decades to generate substantial cash flow.
  • Perform well over time.
  • Relate to assets not considered liquid, meaning that they cannot be sold quickly and easily.
  • Are not greatly affected by economic cycles. They tend to be recession resistant.

Diversification

Brookfield assets are managed through different companies owned or partly owned by Brookfield Corp. The profits BN makes come from different types of assets as shown below.

Chart showing percentage of Brookfield Corporation profit per asset class.

With asset types having different risk profiles and strategies, each one contributes to overall diversification and reduced volatility.

What’s in it for investors?

Investing in alternative assets is a great way to diversify a portfolio. Usually, the returns on such investments aren’t determined by what’s happening on the stock market. You can expect them to generate about 5-7% above inflation over long periods.

The problem for a retail investor is quite simple: it’s virtually impossible to buy a piece of a bridge or a railroad. This is where Brookfield comes into play. Investing in Brookfield Corp. (BN) is like investing in your own “alternative asset fund”.

The Brookfield companies

Brookfield manages assets through seven companies in the Brookfield family and one standalone business.

Brookfield Asset Management (BAM)

BAM is an asset-light alternative asset manager. It doesn’t have many assets but rather manages funds coming from pension plans and other institutional and retail investors. BAM manages the funds and establishes strategies. It makes money by charging fees on its assets under management (AUM). The more money it raises for investments, the more its earnings grow.

Brookfield Corporation (BN)

As the parent company, BN owns part of the other Brookfield companies. It’s also a heavy-asset manager; it not only does the asset-light manager’s job (strategy + earning fees on AUM), but also contributes with its own assets. BN can benefit from its own strategies, sell those assets for a profit in the future, and reallocate the proceeds into new projects or undervalued assets. This is known as asset recycling.

BN has $60B invested in public holdings (BEP, BIP, BBU, BAM, BNRE) and $78B invested in private holdings.

Brookfield Renewable (BEP)

BEP operates one of the world’s largest publicly traded renewable power platforms. Its portfolio consists of approximately 33000 MW of capacity and over 7,000 generating facilities in North America, South America, Europe, and Asia. The company is an experienced global owner and operator of hydroelectric, wind, solar, distributed generation, and storage facilities. Been concerned about renewable energy companies not getting a lot of love lately? See What’s happening with renewables?

Brookfield Infrastructure (BIP)

BPI is one of the largest owners and operators of critical and diverse global infrastructure networks. It operates four segments:

  • Utilities: electricity and gas connections
  • Transport: rail operations, toll roads, terminals, and export facilities
  • Midstream: pipelines, processing, storage
  • Data infrastructure: multi-purpose towers, fiber optic cable, data centers

BIP is well diversified with operations in the Americas (69% of assets), Asia Pacific (14%), and Europe (17%).

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Brookfield Business Partners (BBU)

BBU is a global business services and industrial company focused on owning and operating high-quality providers of essential products and services. Their operations are diversified across the industrial, infrastructure services, and business services sectors.

This is the smallest of the Brookfield kids and potentially the least interesting in my opinion, in part because of its lack of dividend growth. BBU goes after public businesses and acquires them to convert them into private companies.

Brookfield Reinsurance Ltd (BNRE)

Brookfield Reinsurance offers a broad range of insurance products and services to individuals and institutions, including life insurance and annuities, health, personal and commercial property, and casualty insurance. It’s expanding in the U.S. with the announcement of a $1.1B acquisition of Argo Group International Holdings in February 2023. BNRE is a young company. It will take to analyze how it evolves.

Brookfield Property Group (Private)

This private company has a portfolio of $276B in assets invested in housing, logistics (industrial), hospitality, science & innovation, offices, and retail. The portfolio is diversified across many industries and spread across five continents.

In addition to these companies, Brookfield acquired a majority interest in Oaktree, which continues to operate as a standalone business. Brookfield and Oaktree managed a credit portfolio worth $157B with a contrarian, value-oriented and risk-managed approach to protecting capital.

Ownership and stock symbols

Below, you see the asset types, the Brookfield company that manages them, the percentage of ownership the parent BN company has in each company, and the different stock symbols for each company.

"Table

In closing

Brookfield has a complex structure and opaque business models that make it hard to understand. Some of its companies (BN, BIP, and BEP) have sizeable debt but with their cash and assets on hand, debt repayment hasn’t been a problem. In my opinion, the most interesting investments today are BN, BAM, BIP, and BEP. Listen to the following podcasts for recent results:

If something major happens to BN, it likely affects BAM, BIP, and BEP so holding all of them isn’t advisable. Since BN, the parent, has a stake in many industries, investing in it is like a mini-ETF.