Brookfield Infrastructure Partners (NYSE:BIP)(NYSE:BIPC) is one of the global leaders when it comes to investing and operating different classes of infrastructure. The current market cap of BIP is ~ $15.6 billion, with the enterprise value landing at the $50 billion mark.
Roughly 68% of the total FFO generation stems from the Americas region, with the remaining chunk being somewhat evenly distributed between Europe and Asia Pacific.
The investment policy of Brookfield Infrastructure Partners outlines a focus on high-quality assets that generate sustainable and growing distributions over the long-term, where the annual distribution growth target is set at 5–9%.
In my opinion, BIP is an excellent choice for more conservative and retirement-focused investors, where the following investment characteristics matter:
Stable and predictable current income
Income that is protected from inflation and preferably offers slight additional yield on top of the inflation factor
Low leverage, which does not impose too much financial risk into the equation
Let’s now explore the underlying essence of BIP and why this vehicle should be truly considered by investors, who value the aforementioned investment characteristics.
The way BIP creates value is by acquiring durable and defensive infrastructure assets, enhancing them via operations-oriented management, and then once the value is maximized, it divests the asset to fund new opportunities.
At its core, it boils down to a buy and hold strategy, with a typical holding period of 10–15 years. This is in turn enables BIP to receive bond-like cash flows that are further enhanced by CPI escalators and some avenues of potential growth.
Since this kind of strategy resembles fixed income dynamics, the duration factors come into play in a quite notable fashion.
For example, if we look at the chart below, we will notice how Brookfield Infrastructure Partners’ share price has dropped quite considerably since the Fed initiated its aggressive monetary policy.
It is the duration factor which has contributed to a price decline, where adding a higher discount rate to long-dated cash flows introduces a magnified effect on the overall valuations.
What this means for investors is that timing-wise, now is an attractive moment to enter BIP before the SOFR goes back to more normalized levels.
Now, in terms of the FFO generation and key infrastructure exposures, BIP is quite diversified.
It is also worth mentioning that 90% of the FFO stems from contracted and/or regulated channels, which helps de-risk the demand risk at BIP’s level.
Furthermore, almost 80% of the FFO is attached to contracts, which incorporate CPI escalator clauses that render the underlying cash flows less sensitive to interest rate volatility as well as help BIP accommodate organic growth.
What is also critically important in any buy and hold infrastructure asset management is finding the right balance between assets and liabilities, both in terms of the leverage profile and duration match.
As we noticed in the picture above, the weighted average duration of BIP’s cash flows is roughly 10 years (i.e., the contracted FFO maturities).
It means that the Fund does not need to worry about potential drops in the top-line over the foreseeable future (especially taking into account the fact that ~85% of the FFO is generated from businesses with investment-grade debt). In practice, this also offers a great opportunity to source long duration debt in order to match the relevant cash flows, thereby reducing interest rate and duration risk. Plus, it makes the process of distributing stable and growing dividends much easier.
And if we look at the chart below, this is pretty much what we can observe in BIP’s case as well.
With an exception of minor 2024 and 2027 debt maturities, almost the entire chunk of BIP’s debt portfolio carries a similar maturity life as the contracted cash flows. In addition, ~90% of these outstanding borrowings have been assumed at fixed interest rates, which creates very favorable dynamics for long-term investors.
Namely, while the debt proceeds are fixed and thus do not impose any interest rate risk, where the cost of financing would suddenly eat into the FFO component, the cash generation stream is left open to the upside. This way, investors are attractively positioned, because as time passes, the top-line accumulates thanks to the CPI indexation and fixed escalators, contributing to more ample free cash flows for distribution.
Finally, the overall financial risk at BIP’s books is limited, which is confirmed by the investment-grade credit ratings of BBB+ from S&P and Fitch.
The bottom line
Brookfield Infrastructure Partners is an excellent investment pick for investors, who are either at (or close) to retirement, or just generally favor stable and predictable income with modest upside potential.
Currently, BIP yields 5% and with its recent dividend hike has managed to grow and distribute cash flows already 15 years in a row.
Going forward, investors should feel comfortable in capturing growing dividends that are backed by durable contracts with embedded escalators, which should directly feed into incremental distributions as the debt remains fixed for ~10 years in the future.
Plus, there is a notable upside potential that could stem from normalizing SOFR levels. In this case, BIP should respond very well (to the upside) due to the notable exposure to duration factor.