Globe & Mail Shares of Brookfield Infrastructure Partners LP (BIP.UN) have fallen like a stone. Are you planning to hold on to your units, or would you consider selling and putting the money into something more promising?
I’ve held Brookfield Infrastructure for many years, and it’s rewarded me with growing distributions and, until recently, a rising stock price. As a long-term investor, the last thing I would do is sell a good company just because its share price has suffered a setback. In fact, if it wasn’t already one of my largest holdings – both personally and in my model Yield Hog Dividend Growth Portfolio – I would even consider adding to my position to take advantage of the lower market price.
That’s not to say I’ve enjoyed watching the shares tumble. In the past six months, units of the limited partnership – whose global infrastructure portfolio includes utilities, communications towers, railroads, toll roads and data centres – have skidded about 24 per cent, excluding distributions. Shares of sister company Brookfield Infrastructure Corp. (BIPC), have fared even worse, dropping about 30 per cent.
As unpleasant as that’s been, there’s nothing inherently wrong with Brookfield Infrastructure’s businesses. The chief problem is rising interest rates. In addition to making it more expensive for companies to run their operations and finance acquisitions, higher rates put downward pressure on stock market valuations. This is especially true for companies such as Brookfield Infrastructure that pay dividends and must compete with the rising yields offered by bonds and guaranteed investment certificates. For the yields on dividend stocks to rise, their share prices – which move in the opposite direction – must fall.
Investors are also worried that higher interest rates will compress the valuations of businesses that Brookfield Infrastructure plans to sell as part of its capital recycling program. The company is aiming to divest about US$2-billion of assets in 2024, with plans to redeploy the cash into higher-return opportunities.
If there’s a silver lining in all of this, it’s that high interest rates should make more acquisitions available to Brookfield Infrastructure at attractive valuations. So, while high rates may hurt the company as a seller, they help it as a buyer.
“Capital recycling is all about the spread in returns, not the absolute level of valuations/returns,” Robert Kwan, an analyst with RBC Dominion Securities, said in a note this week after meetings with Brookfield Infrastructure’s senior management team.
Brookfield Infrastructure actually sounds rather cheerful.
“The market backdrop has created a strong environment for capital deployment, with returns on new investments expected to be well in excess of our 12- to 15-per-cent target,” the company said when it released third-quarter results on Nov. 1.
“Our 2023 deployment is expected to provide us with some of the best risk-adjusted returns we have seen in the last decade,” it added.
Recent deals included the acquisition of Triton International Ltd., the world’s largest lessor of intermodal shipping containers, and the pending purchase of a portfolio of data centres out of bankruptcy from Cyxtera Technologies Inc.
In a recent note, analyst Frederic Bastien of Raymond James cited several factors that give Brookfield Infrastructure an advantage in the current high-rate, high-inflation environment. These include built-in inflation escalators in many of its businesses; strong capital deployment that has paved the way for growth in future years; and a balance sheet in which roughly 90 per cent of its debt is locked in at fixed rates, with an average maturity of seven years.
“Lastly, management is backing its strong conviction in the value of the business with share buybacks,” Mr. Bastien said.
If Brookfield Infrastructure is buying its shares, I’m not selling mine.
Finally, in recent weeks, sentiment appears to have shifted in Brookfield Infrastructure’s favour. With inflation moderating and interest rates having possibly peaked, BIP.UN has gained about 20 per cent in November, while BIPC is up about 22 per cent. Both are still well below their previous highs, but with BIP.UN and BIPC yielding about 5.6 per cent and 4.8 per cent, respectively – and a distribution hike expected in the new year – investors are being paid to wait.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.