This article was published on Dividend Kings on Monday, May 22nd.
Maybe you’ve noticed that Wall Street has fallen in love with artificial intelligence, or AI, tech stocks recently.
It’s not hard to understand why. The National Bureau of Economic Research estimates that AI could boost U.S. productivity and economic growth by 2.7% per year, and Goldman thinks that in 10 years, S&P 500 (SP500) earnings could be 30% higher “or more.”
In other words, AI doesn’t just potentially promise to supercharge U.S. economic growth but also corporate earnings growth, which could lead to the S&P delivering 12% to 13% long-term returns.
That’s potentially life-changing for retirees, pensions, and anyone who dreams of retiring in safety and splendor.
But what if I told you there was an even bigger investment opportunity than AI?
An opportunity hiding in plain sight that won’t just benefit from future global economic growth supercharged by AI but actually make it possible in the first place.
Global infrastructure is that megatrend, and it’s a $100 trillion investment opportunity over the next 25 years.
Let me show you why Brookfield Infrastructure Partners L.P. (NYSE:BIP) and Brookfield Infrastructure Corporation (NYSE:BIPC) (collectively, “Brookfield Infrastructure,” differences explained below) are the absolute best pure-play high-yield ways to cash in on the mother of all global gold rushes.
One that won’t end in 30 years but will just be getting started.
In other words, BIP is a 4.1% yielding sleep-well-at-night or SWAN stock that offers 15% to 16% annual return potential, not just for the next 25 years but potentially for the next 50-100 years.
This makes Brookfield Infrastructure potentially life-changing for retirees today and could set up your children, grandchildren, and favorite charities for a dividend-filled, prosperous future you’ve never dared to dream was possible.
As mentioned, Brookfield Infrastructure is available in two forms, BIP and BIPC.
What is the tax nature of the distributions paid by Brookfield Infrastructure Corporation? Subject to the holding period, dividends paid by Brookfield Infrastructure Corporation will be eligible for “qualified dividend” treatment. Whether dividends paid by Brookfield Infrastructure Corporation will, in fact, be “qualified dividends” to any shareholder will depend on that shareholder’s specific circumstances, including the shareholder’s holding period for the Brookfield Infrastructure Corporation shares on which such dividends are received.” – Brookfield (emphasis in original).
BIP is the corporate version and pays qualified dividends with no K1 tax form. It’s safe to own in retirement accounts. There is no UBTI or tax complexity other than one thing.
Dividends paid from Brookfield Infrastructure Corporation to a U.S. resident shareholder may be subject to Canadian withholding tax…The withholding tax rate can range from nil to 25%.” – Brookfield (emphasis added).
U.S. investors have a 15% dividend tax withholding in TAXABLE ACCOUNTS.
Retirement accounts have no withholding, like 401Ks, IRAs, and Roth IRAs.
There is no economic difference between BIP and BIPC. They own the same assets and pay the same dividends.
The only difference is the price and yield.
BIPC is a hold and what most people will want. That’s why it trades at a premium because people really hate K1 tax forms.
BIP’s K1s are more complex than most limited partnerships because its asset is limited partnerships themselves.
Unlike most LPs, its distributions are NOT 100% return of capital, reducing your cost basis.
Some of BIP’s distributions are taxable in any given year, a mix of short and long-term capital gains.
Today, we’re talking about why BIP is a potentially reasonable buy; BIPC is a “hold” and watchlist for the coming recession and likely fresh bear market lows.
Brookfield Infrastructure is run by Brookfield Corp and managed by Brookfield Asset Management.
Brookfield was founded in 1902 and is the world leader in global infrastructure investing.
It operates on five continents, and BIP owns a diversified portfolio of assets, including:
Brookfield’s claim to fame is that it’s generated 20% annual returns for the last 40 years, and management thinks it can generate at least 20% returns for the next 20 years.
How on earth can they claim that’s their goal? 60+ years of Buffett-like returns? Not even Warren Buffett thinks he can achieve that!
According to Brookfield, green energy infrastructure alone is 2nd biggest investment opportunity in history, amounting to $5 trillion per year in investable opportunities.
To profit from this potential $150 trillion megatrend, Brookfield set up Brookfield Renewable Partners L.P. (BEP) and Brookfield Renewable Corporation (BEPC).
And what about non-green energy infrastructure? That opportunity is potentially almost as large, around $100 trillion over the next 25 years.
Oxford Economics and the Global Infrastructure Outlook estimate that by 2040, the world will need to spend $94 trillion on traditional infrastructure to keep up with expected population growth, $97 trillion when factoring in the UN’s sustainable development goals.
Essentially we’re looking at a $100 trillion global investment opportunity in the next quarter century alone.
These numbers are almost incomprehensible. They are so large. But allow me to try to provide some context.
$100 trillion in traditional global infrastructure spending is:
The global economy today is $100 trillion, and the U.S. economy is $25.5 trillion.
Americans spend roughly $74 billion per month on groceries.
And this is what the world will average in traditional infrastructure spending every eight days for the next quarter century.
It equals buying the average home in Scottsdale, Arizona, every 8.1 seconds for the next 25 years.
The amount of money the world will spend on non-green energy infrastructure could buy every American man, woman, and child a cup of coffee every 24 hours for the next 25 years.
To help you wrap your head around just how big this opportunity really is, let’s consider just one small slice of global infrastructure, data, and just for the next five years.
Brookfield estimates the world will need to spend $1 trillion just over the next five years for data infrastructure alone.
In the next five years alone, the world is going to need to add 10 GW of data center capacity. In 2021, the entire global data center capacity was 9 GW, meaning we need to double our data center capacity in five years.
BIP’s telecom towers come with long-term contracts, up to 30 years long, with take-or-pay provisions. In other words, it’s 100% guaranteed every penny of contractual revenue, even if its customer doesn’t actually use the towers.
Deglobalization, aka “Friend shoring,” where free trade is only between the West and non-enemies of the West, is another megatrend.
Intel is taking advantage of the Chips Act to get tax credits to build two new chip plans for $30 billion. Brookfield is funding 50%, and BIP’s cut of that investment opportunity is $500 million.
According to Goldman Sachs, by 2040, the world’s population will be around 8.5 billion, and its economy will have doubled to an inflation-adjusted $195 billion.
Do you think infrastructure spending is going to slow down after 2040? No, it’s going to keep right on growing.
Why? Because while Goldman expects inflation-adjusted global growth to keep slowing over time as the developing world catches up to the West, it’s still expected to grow…to massive size.
In other words, adjusted for inflation, Goldman thinks that even with all the world’s current headwinds (like slowing population growth, an aging population, and climate change), the inflation-adjusted global economy will be 5X larger by 2080, and likely about 7X larger by 2100 (about $700 trillion).
To meet this investment need, the world will need to increase the proportion of GDP it dedicates to infrastructure to 3.5 percent, compared to the 3.0 percent expected under current trends.” – Oxford Economics.
Right now, the world is spending 3% of GDP or 1/33rd of global output on infrastructure.
Assuming that this proportion holds long-term, then by 2080, global infrastructure spending (excluding green energy) could be $15 trillion per year. And that’s in today’s money.
Brookfield Infrastructure isn’t just riding a 25-year megatrend but a potential 100-year megatrend and the smart income investors’ road to dividend-fueled riches.
BIP is currently running an annual investment rate of $2.4 billion per year and had a growth backlog of projects of $6.4 billion at the end of 2022.
Yes, the world leader in global infrastructure has less than 1% market share!
The growth runway for BIP isn’t just huge, it’s decades-long, and the scalability of this high-yield SWAN is almost beyond imagining.
Infrastructure is the biggest growth opportunity for Brookfield. It buys assets when undervalued, improves them, manages them, and sells them at a fat profit after years of profiting from steady contracted cash flow.
Recent examples of asset sales include U.S. container terminals, where it earned 19% annual returns and made 3.2X its money.
It sold Brazilian transmission lines, where it made 22% annual returns for a 140% profit.
BIP’s goal is to grow cash flow per share by double digits and its dividend by 5% to 9% per year.
In the last decade, they achieved their goals, as they have almost always done for the last 40 years at Brookfield Asset Management.
BIP’s scalability is so strong that BIP could potentially grow at double-digits not a few years, not even for 50 years, but possibly for the next 100 years.
BIP is a great inflation hedge, as are all hard assets. 73% of cash flow is linked to inflation; another 12.5% benefits from it through strong pricing power.
Across the world, inflation is still high globally, and BIP is ready to protect investors and profit from it.
How is BIP able to take advantage of the largest investment opportunity in history?
Through smart and safe use of non-recourse self-amortizing debt.
Basically, Brookfield takes out a commercial mortgage to buy something like a port, railroad, or telecom towers.
It then uses the cash flow from that asset to pay the mortgage.
If the asset suffers a catastrophe, such as a hurricane destroying its port, and can’t pay the mortgage, it can “hand over the keys” to its creditors.
It then isn’t liable for the remaining loan, and its creditors don’t have the recourse to come after it for any additional money.
Just like Buffett used 60% leverage via insurance float to transform 12.8% long-term returns into 20% returns, non-recourse debt is how BAM has delivered 40 years of 20% returns and thinks it can deliver at least another 20 years of 20% returns.
What about higher interest rates? How much of a threat is that?
BIP estimates that for every 1% increase in interest rates, its cash flow would fall by 1%.
The highest interest rates in history were 20% in 1980; back then, inflation was 15% and rising.
What about currency risk? In 2022, the U.S. dollar hit its strongest level against other currencies in 20 years.
And yet, thanks to smart and prudent hedging, BIP’s cash flow fell less than 2%.
The bottom line is that, when it comes to global infrastructure opportunities, no one does it better than Brookfield.
What do analysts expect from BIP in the next few years?
|Metric||2022 Growth||2023 Growth Consensus||2024 Growth Consensus||
2025 Growth Consensus
|Dividend||6%||6%||7%||6% (17-year streak)|
(Source: FAST Graphs, FactSet.)
Sales and cash flows can be highly volatile based on the timing of asset sales. But the dividend grows every year, just as it has since BIP’s IPO in 2008.
What about the long-term growth outlook?
The median growth consensus from all 12 analysts is 12.1%, slightly faster than the growth rate of the last decade.
|Investment Strategy||Yield||LT Consensus Growth||LT Consensus Total Return Potential|
|Brookfield Infrastructure Partners||4.1%||12.1%||16.2%|
|Brookfield Infrastructure Corp||3.2%||12.1%||15.3%|
|ZEUS Income Growth (My family hedge fund)||4.2%||10.0%||14.2%|
|Vanguard Dividend Appreciation ETF||2.0%||11.3%||13.2%|
|Schwab US Dividend Equity ETF||3.6%||7.6%||11.2%|
|60/40 Retirement Portfolio||2.1%||5.1%||7.2%|
(Source: DK Research Terminal, FactSet.)
BIP offers potential returns on par with the greatest investors in history and far better than the S&P, Aristocrats, or even the Nasdaq.
BIP has been delivering 16% annual returns for the last 15 years, similar to what analysts think it can deliver long-term.
Historically BIP is valued by income investors between 5 and 6X EBITDA.
|Metric||Historical Fair Value Multiples (20-Years)||2022||2023||2024||2025||12-Month Forward Fair Value|
|5-Year Average Yield||4.11%||$35.04||$37.23||$37.23||$42.09|
Discount To Fair Value
Upside To Fair Value (including dividend)
|2023 EBITDA||2024 EBITDA||2023 Weighted EBITDA||2024 Weighted EBITDA||12-Month Forward P/EBITDA||Historical Average Fair Value Forward P/EBITDA||
Current Forward PE
If you include the historical dividend yield, BIP is historically valued at 5X EBITDA.
Today it trades at a modest discount of 4.6X.
Analyst Median 12-Month Price Target
Morningstar Fair Value Estimate
|$42.83 (5.3X EBITDA)||$40.04 (4.9X EBITDA)|
Discount To Price Target (Not A Fair Value Estimate)
Discount To Fair Value
Upside To Price Target (Not Including Dividend)
Upside To Fair Value (Not Including Dividend)
12-Month Median Total Return Price (Including Dividend)
Fair Value + 12-Month Dividend
Discount To Total Price Target (Not A Fair Value Estimate)
Discount To Fair Value + 12-Month Dividend
Upside To Price Target (Including Dividend)
Upside To Fair Value + Dividend
Morningstar’s quantitative fair value model agrees that BIP is worth about 5X EBITDA, and that’s pretty much what analysts expect it to trade at in the next year as well.
|Rating||Margin Of Safety For Low-Risk 11/13 SWAN||2023 Fair Value Price||2024 Fair Value Price||12-Month Forward Fair Value|
|Potentially Reasonable Buy||0%||$39.35||$41.20||$40.10|
|Potentially Good Buy||15%||$33.45||$35.02||$34.08|
|Potentially Strong Buy||25%||$29.51||$30.90||$30.07|
|Potentially Very Strong Buy||35%||$21.74||$26.78||$26.06|
|Potentially Ultra-Value Buy||45%||$21.64||$22.66||$22.05|
|Upside To Fair Value (Including Dividends)||10.51%||15.52%||12.53%|
For anyone comfortable with its risk profile BIP is a potentially reasonable buy.
There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
BIP’s annual report offers a detailed explanation of all the things that could go wrong.
How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
DK uses S&P Global’s global long-term risk-management ratings for our risk rating.
The DK risk rating is based on the global percentile of a company’s risk management compared to 8,000 S&P-rated companies covering 90% of the world’s market cap.
S&P’s risk management scores factor in things like:
BIP Long-Term Risk Management Is The 165th Best In The Master List 67th Percentile In The Master List)
|Classification||S&P LT Risk-Management Global Percentile||
|BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL||100||Exceptional (Top 80 companies in the world)||Very Low Risk|
|Strong ESG Stocks||86||
Very Low Risk
Good, Bordering On Very Good
|Foreign Dividend Stocks||77||
Good, Bordering On Very Good
|Ultra SWANs||74||Good||Low Risk|
|Dividend Aristocrats||67||Above-Average (Bordering On Good)||Low Risk|
|Low Volatility Stocks||65||Above-Average||Low Risk|
|Master List average||61||Above-Average||Low Risk|
|Dividend Kings||60||Above-Average||Low Risk|
|Hyper-Growth stocks||59||Average, Bordering On Above-Average||Medium Risk|
|Dividend Champions||55||Average||Medium Risk|
|Monthly Dividend Stocks||41||Average||Medium Risk|
(Source: DK Research Terminal.)
BIP’s risk-management consensus is in the top 37% of the world’s best blue-chips, and is similar to:
The bottom line is that all companies have risks, and BIP is good at managing theirs, according to S&P.
When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes.
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.
Let me be clear: I’m NOT calling the bottom in BIP (I’m not a market-timer).
Even Ultra SWANs and aristocrats can fall hard and fast in a bear market.
Fundamentals are all that determine safety and quality, and my recommendations.
While I can’t predict the market in the short term, here’s what I can tell you about BIP.
There are lots of great megatrend opportunities for smart income investors to profit from.
But of all the megatrends to profit from the future of global growth, none is bigger, better, or easier to harness than infrastructure.
Why? Because infrastructure is literally the backbone of the modern world and its economy.
None of the other megatrends are possible without physical infrastructure like telecom towers, fiber optics, data centers, and smart grids.
To build these things, we need real physical stuff, like metals and minerals necessary for the green energy transition and advanced electronics that power data centers and AI.
Guess what ChatGPT can’t do? Build a lithium mine and help us get the raw materials we need to build batteries, and then ship them by rail and sea so that we can get our Teslas. 😉
Selling picks and shovels to gold miners is a lot easier way to get rich than actually mining for gold.
And there is no better low-risk, high-yield pure-play SWAN than Brookfield Infrastructure.
Brookfield has been doing global infrastructure since 1902 before most of today’s corporations even existed.
No one has proven an ability to harness safe debt to generate Buffett-like returns better than Brookfield.
And unlike Buffett, who admits he’ll never again deliver 20% long-term returns, Brookfield says it can. And as I just showed you, there are trillions of reasons why I believe them, and so can you.
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