Brookfield Infrastructure Partners: Solid FFO Growth, 6% Yield And Upside Potential (BIP)

Brookfield Infrastructure Partners L.P. (NYSE:BIP) is a promising passive income investment with an international profile, a diversified portfolio, resilient FFO and a low FFO payout ratio.

The focus on owning and operating regulated infrastructure assets leads to long-term FFO visibility, and the company has delivered impressive distribution growth over the last decade.

Brookfield Infrastructure Partners is selling for a low FFO multiple when taking into account the strength of its value proposition. With a 6% covered yield on offer, units of Brookfield Infrastructure Partners are a Buy.

My Rating History

When Brookfield Infrastructure Partners’ unit price declined 40% last year, I jumped into the void and added BIP to my passive income portfolio in October 2023. The core argument at the time was that Brookfield Infrastructure Partners was a diversified investment company with considerable earnings strength.

BIP has seen a reasonable reversal since, but the stock continues to have re-rating upside, in my view. Since the company reported strong results for 4Q’23 and has a low payout ratio, I think BIP’s units are still a Buy for passive income investors.

Ownership Of Critical Infrastructure Assets Translates Into Long-Term FFO Stability

Brookfield Infrastructure Partners is a Canada-based infrastructure investment company with a global footprint. BIP invests in different core areas such as Utilities, Transportation, Midstream and Data Centers.

Brookfield Infrastructure Partners owns assets that are absolutely critical for the facilitation of economic growth. The company’s investments include thousands of miles of natural gas pipelines, natural gas storage facilities, terminals, toll roads, rail assets, telecom towers and data centers.

Brookfield Infrastructure Partners even partnered with Intel to construct a $30 billion semiconductor manufacturing facility in Arizona.

Brookfield Infrastructure Partners mainly operates in the United States and Europe, but also owns infrastructure assets in South America and in the Asia-Pacific region.

Brookfield Infrastructure Partners is a unique company in the sense that it owns a diversified portfolio of high-in-demand infrastructure assets that produce a boatload of predictable FFO.

The largest segment in 2023 was Transport which produced 39% of the company’s total FFO, followed by Utilities (29%), Midstream (23%) and Data (9%). The two biggest segments, Transport and Utilities, earned a cumulative $1.8 billion in FFO for the company.

A key asset for Brookfield Infrastructure Partners is that it relies on infrastructure assets that are situated in highly regulated industries, which in turn equates to a low degree of volatility in the underlying cash flow.

This has obviously big implications for passive income investors, since the focus on cash flow-stabilized energy businesses translates into a high degree of dividend visibility as well as a stable FFO-based payout ratio. Only about 10% of BIP’s cash flow is subject to market price fluctuations, whereas the overwhelming majority of cash flows is not.

The second key feature of an investment in Brookfield Infrastructure Partners is that it has a very stable FFO-based payout ratio: In 2023, the company paid out 66% of its FFO, and it paid out 68% of its FFO in 2022.

In the last ten years, BIP paid out 70% of its FFO, which leaves us with a very high margin of safety and room for incremental distribution growth.

Furthermore, Brookfield Infrastructure Partners has been able to grow its FFO by 15% since 2009 whereas the distribution went up by 10%.

FFO Guidance And FFO Multiple

Brookfield Infrastructure Partners targets 6-9% annual FFO per unit growth in the long term, and the company reported $2.95 in FFO per unit in 2023. If Brookfield Infrastructure Partners grows its FFO by 7.5% in 2024, then BIP could be on track to earn $3.17 per share this year.

With a unit price of $28.84, BIP costs passive income investors 9.1x estimated 2024 FFO, a bargain in my view. BIP sold as high as $36 (12.6x FFO) last year before concerns over higher interest rates started to weigh on the company’s valuation throughout the year.

A re-rating to $36, which I think is entirely possibly, implies a FFO multiple of 11.4x which, taking into account BIP’s low 70% payout ratio and solid FFO per share growth, would hardly make BIP’s unit overpriced.

Why The Investment Thesis Might Disappointed

Brookfield Infrastructure Partners has a lot of economic risk as the company primarily invests in critical infrastructure and therefore broadly reliant on positive global GDP growth.

An acceleration of economic growth thus poses upside for the company’s FFO, while an economic contraction would likely have the opposite effect. Since most of Brookfield Infrastructure Partner’s cash flows originate from regulated industries (like Utilities, Transport or Midstream), I think that the risk of a substantial FFO contraction even in a recession scenario is quite limited.

My Conclusion

Brookfield Infrastructure Partners is a compelling infrastructure investment company that differentiates itself from the competition by owning a diversified portfolio of core infrastructure assets in four major segments.

Brookfield Infrastructure Partners thus not only profits from diversification, but the company’s core focus on a small number of highly regulated industries yields long-term FFO visibility.

Furthermore, BIP has a low payout ratio based on FFO and is presently paying a 6% yield. I do see re-rating potential for Brookfield Infrastructure Partners, particularly in an environment of robust underlying economic growth.

Both the valuation and the dividend have a high degree of safety, and my stock classification on BIP remains a Buy.