A lack of investment in infrastructure has been a feature of developed and emerging economies for nearly half a century and has led to a massive shortfall in infrastructure globally. It is estimated by consultancy firm McKinsey that by 2030 there will be an investment shortfall of US$20 trillion for developing nations alone.
This doesn’t take into account rapidly growing emerging economies, which have an even greater need for infrastructure, or the limited response of a large number of governments in developed and emerging economies because of their fragile fiscal positions.
The situation has created an opportunity for listed infrastructure; private funding is the only realistic way to address the massive shortfall in investment.
Consequently, this is shaping up to be a powerful long-term tailwind that should see gaining quality exposure at the top of every investor’s watch list. One of the best ways to gain quality exposure to this phenomenon is through Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP).
Now what?
Brookfield Infrastructure owns and operates a globally diversified portfolio of infrastructure assets. This portfolio is composed of telecommunications towers, ports, railways, toll roads, electricity transmission, energy distribution and storage networks across both developed and emerging economies including Canada, the U.S., Australia, Western Europe, Brazil, Chile, Colombia, and India.
This diversification enhances its growth prospects because emerging markets typically experience stronger economic growth than developed markets, whereas developed markets provide a greater degree of earnings stability. These types of assets typically operate in oligopolistic markets with steep barriers to entry and wide economic moats. This will protect Brookfield Infrastructure from competition and enhance its prospects of growing earnings over the long term.
As a result, it continues to generate solid EBITDA margins–a key measure of profitability–which have steadily grow in recent years and now exceed 50%.
More importantly, the partnership remains focused on taking advantage of the shortfall in investment in infrastructure through organic growth and actively making accretive acquisitions.
Brookfield Infrastructure has liquidity of US$3 billion, which gives it the ability to continue funding its own projects, to build existing operations, and to make opportunistic acquisitions. It is also well positioned to deliver strong organic growth from existing assets as the demand for infrastructure continues to grow. Importantly, this does not require new capital because it will be funded by existing cash flows.
All of these factors leave it well positioned to achieve its stated objective of targeting total annualized returns of 12-15% over the long term.
Brookfield Infrastructure also has an impressive history of dividend increases, having hiked its distribution every year for the last seven years straight to give it a tasty 5% yield.
What’s more is that the distribution remains sustainable. It has a conservative payout ratio of 65% of free funds flow from operations. This coupled with Brookfield Infrastructure’s growth strategy should allow it to continue rewarding investors with further regular dividend hikes.
So what?
It is hard to pass up an investment opportunity such as Brookfield Infrastructure. Not only does it reward investors with a regularly growing income stream, but it is well positioned to continue benefiting from the shortfall of investment in global infrastructure.
Furthermore, its high degree of liquidity coupled with its exposure to emerging markets means it will continue to grow at a rapid rate through a combination of organic growth and acquisitions while unlocking value for investors.
