I once had a huge research report due for clients and the
deadline was quickly approaching. My computer had just frozen and I
thought the best thing to do at that point was to reboot. But my
computer wouldn't start up. That was my only computer and the
document, which had about 100 pages, hadn't been backed up in quite
It turned out I needed to reinstall the operating system, which
would wipe out my current hard drive. At that point, getting access
to my document had become priceless. That episode taught me an
important lesson: Save early and often.
Well, this lesson doesn't just apply to backing up data. It's
also a key ingredient for successfulinvesting . Just like certain
documents and pictures, in business, a few irreplaceable assets
have significant value and no adequate substitute.
Take pipelines for example. Once they have been built, it's
simply not feasible for another company to come along and build a
new pipeline next to the existing one. Add the fact that pipelines
have a valuable use as they carry oil, natural gas, fuels and other
commodities across the country, and it really becomes hard to find
a valid substitute for them.
There are other irreplaceable assets all over the globe, too:
toll roads, electricity transmission grids, ports and
And that's why companies dedicated to infrastructure tend to
deliver more stable and predictable returns through dividends and
capital gains in the long run. After all, infrastructure represents
essential, ongoing services the global society needs to function
And because governments around the world are increasingly
selling existing public assets to private enterprises and allowing
the private sector to participate in major community projects, the
number of infrastructureinvestment opportunities is rapidly
The theme here seems clear: Investors who have a place for these
types ofstocks in their portfolio are able to not onlyprofit from a
rapidly-growing sector, but have a layer of insulation fromstock
market volatility, economic downturns andinflation .
Today, there are many infrastructure projects being developed
across the globe, allowing greater sector and
geographicdiversification for investors. In that light, one of my
favorite infrastructure stocks is a company called
Brookfield Infrastructure (
Thismaster limited partnership (
) owns toll roads, electricity-transmission grids, ports and
railroads in North and South America, Australasia and Europe. And
best yet, these irreplaceable assets continue to pay a healthy and
steady income stream for Brookfield and its investors.
MLPs are required to pay out almost all of their income to
investors in the form of distributions and usually have exceptional
yields. MLPs have done quite well during the past 12 years,
outperforming the S&P 500 in 11 of those years. During this
period, the average yearly total return for MLPs was more than 15%
compared to the 5% return for the S&P.
These investment vehicles are a little complex. But although
it's important that investors understand the intricacies of an MLP,
the best part to remember is that their distributions are
characterized as tax-deferredreturn on capital , so they're not
subject todouble taxation . This means they can pay a higher
distribution amount to unit holders.
Look at how Brookfield has rewarded its shareholders since
Brookfield operates in three distinct businesses:
1. Transportation and energy
: Through this segment, the company provides transportation,
storage and handling services for energy, freight, bulk commodities
and passengers. Its transport and energy platform is geographically
diverse, consisting of pipelines in the United States; ports in the
U.K., Europe and China; a rail network and energy-distribution
operation in Australia; and a toll road in Chile.
The operations within the company's utilities platform are
geographically diverse, spanning six countries on four continents
-- Australia, New Zealand, the U.K., Chile, Colombia and
This business provides essential wood products for the
globaleconomy on a sustainablebasis . Its consists of 419,000 net
acres of high-quality freehold timberlands located in the coastal
region of British Columbia, Canada and the U.S. Pacific Northwest
Despite relatively weak global economic conditions, Brookfield
Infrastructure posted solid operating results during the third
quarter of 2012.Funds from operations (FFO) reached $113 million,
an increase of $16 million over the third quarter of 2011. The
improvement was reflected by the strong performances in the
utilities and the transport and energy businesses.
FFO per unit was 58 cents in the third quarter of 2012, which
was 4 cents lower than the prior year. The drop was due to the
company's Augustequity offering , whose proceeds have not yet begun
to generatecash flow . This drop in FFO hasput the stock in value
territory, with its forward price-to-earnings (P/E ) ratio being
around 18, which is lower than the industry average of 27.
About 80% of its cash flow is generated from regulated
businesses or long-term contracts and thepayout ratio is about 65%,
which is the midpoint of Brookfield's target range of 60% to 70%.
It earned an adjusted FFOyield of 8% in the third quarter.
When I look at opportunities for Brookfield in 2013 and beyond,
it has abacklog of accretive expansion projects, incremental
returns from newinvestments and a solid track record of
distribution growth with an average annual increase of 12% since
Risks to Consider:
Brookfield's timber, ports and terminals are very dependent on
the state of the global economy, so a global economic slowdown
could impairearnings . Much of its success is indirectly driven by
fast-growing Asian countries, especially China. If there is a major
economic slowdown in these countries, then it could have adverse
effects on Brookfield's businesses.
Action to Take -->
Brookfield Infrastructure is a good buy up to $40 a share. Myprice
target is $50 during the next 12 months. With an annual yield of
about 4%, this is a perfect holding for safety-first investors
seeking reliable income and steady long-term growth.
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