An Infrastructure Play to Help Diversify
Roger Nusbaum
06/16/08 - 09:56 AM EDT
In the never-ending quest for quirky holdings that might be able to deliver equitylike returns with little or no correlation to the U.S. stock market, as well as a decent dividend, here's a look at Brookfield Infrastructure Partners(BIP).
BIP, which was spun off from Brookfield Asset ManagementBAM on Feb. 1, owns infrastructure assets that it describes as high quality "with high barriers to entry and low maintenance capital requirements that generate stable and growing cash flows." It plans to invest in other projects it believes has similar attributes.
The management hopes to find these attributes with toll roads, airports, ports, more timber and more electrical transmission.
The current mix is comprised of complete ownership of Ontario Transmission, partial stakes in electricity transmission in Brazil and Chile and partial stakes in timber companies in Vancouver, Oregon and Washington State.
BIP thus far has delivered on the potential for low correlation, with only a 0.27 correlation to the S&P 500SPX, but it has been more volatile than the market so far, and BIP has lagged SPX since inception by 3%. I believe the lag and the volatility are mostly attributable to the timing of the initial listing, as the financial crisis has been unkind to just about every sort of high-yielding-but-complicated investment product out there.
The focus on cash flow as part of the objective reveals the intention to pay steady dividends, which for now are pegged at $0.265 quarterly per share. That targets a 60-70% payout ratio of adjusted net operating income (ANOI), which for BIP's management will be the bottom line measurement of profitability.
The payout may stray from 60-70% as new acquisitions are made and digested, to which I would add, it makes sense to expect the occasional writedown, depreciation or other form of impairment as well.
The reason to mention this is that these sorts of investment products are often complex businesses that do a lot of transactions that can make analyzing them a little more difficult than regular stocks. Similar products are quite active in this regard, and the Brookfield Web site tells prospective investors this will be the case with BIP.
This does not make BIP a poor investment, but it does underscore that BIP might require a little more work to follow it.
There's also a leap of faith that not only can management successfully run the current operation, but that they will buy "the right" assets in the future and be able to successfully run those new assets as well.
One other possible factor contributing to the volatility may have been the issue with brownouts in Chile due to a lack of hydroelectric generation, and a few other factors that could lead to more serious problems. This is an ongoing issue, and while President Bachelet is working diligently to avert a crisis, anyone buying BIP needs to follow this issue.
One possible catalyst for price appreciation over the next couple of years could be the timberland. In the most recent quarterly report, the company reported that the electricity generation was profitable but that the timber asset results were weak and generated a loss. This has not been the best of times for most timber companies, but that market will turn. Assuming BIP still owns timberland when it does turn, it could pick up a nice tailwind.
I think BIP would ideally be a "purpose" holding as opposed to a hot stock that might double in a year. The company aims to deliver a 10% to 15% total return, including the dividend, which at current prices is 5.5%. That would be a fantastic result, but expectations should probably be a little lower.
Consistent 15% total returns are few and far between, but that does not invalidate the thesis for BIP's attributes, and its place in the infrastructure theme and a diversified portfolio.
