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Profit From a Company That Owns "Irreplaceable Assets"
1/23/2013 2:00:00 PM
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 some time.
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 railroads.
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 properly.
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 growing.
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 ( BIP ) .
Thismaster limited partnership ( MLP ) 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 2009:
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.
2. Utilities: 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 Canada.
3. Timber: 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 region.
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 2009.
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.