When a quality stock dips, it’s a chance to take a closer look to see if it’s an opportunity to buy. On August 17 Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) dipped by over 3%. Before thinking about buying its shares or not, we shall explore these questions: is it a quality stock? Why did it dip?
Is it a quality stock?
Brookfield Infrastructure primarily operates in Australia, North and South America, and Europe. It owns and operates high-quality, long-life assets that generate stable cash flows and have barriers to entry. These assets tend to appreciate in value over time.
Brookfield Infrastructure’s businesses include utilities, transport, energy, and communications infrastructure. Specifically, its utilities business consists of a regulated terminal, one of the world’s largest coal export terminals, in Australia. It also has around 10,800 kilometres of electricity transmission lines in North and South America, and an electricity and natural gas distribution network.
Further, with roughly 5,100 kilometres of track, Brookfield Infrastructure is the sole provider of rail transportation in southwestern and Western Australia. Additionally, it’s the operator of about 4,800 kilometres of rail in South America. Other parts of its transport business include toll roads in Brazil and Chile as well as 30 port terminals in North America, the U.K., and Europe.
It also has business in energy transmission, distribution, and storage, but that’s not all. In March it acquired communications infrastructure that provides essential services to the media broadcasting and telecom sectors in France.
Why did it dip?
If it’s such a high-quality company that has so many valuable assets, why did it dip over 3%? It’s an unusually high percentage change for this low-beta stock.
It turns out Brookfield Infrastructure is buying Asciano Ltd, a high-quality rail and port logistics company in Australia with an enterprise value of ~A$12 billion. Specifically, Brookfield Infrastructure is investing U$2.8 billion for an approximate 55% stake.
Usually, a company acquiring another will dip in price. In this case, it’s because Brookfield Infrastructure will have less cash on hand and more diluted units after the transaction, even though the acquisition is expected to be accretive to funds from operations per unit.
Brookfield Infrastructure pays out dividends in U.S. dollars. Foolish investors can get its shares at $53 and receive a 4% yield. If you calculate in the strong U.S. dollar by adding an extra 25%, then its current yield is 5%.
In the current low oil-price environment, the Canadian dollar is likely to stay low for a while, which benefits shareholders.
Brookfield Infrastructure targets to keep the payout ratio between 60-70%. With the payout ratio around 68%, its yield is sustainable. Further, in the foreseeable future the firm plans to increase it by 5-9% per year, supported by funds-from-operations growth.
Tax on the income
Brookfield Infrastructure pays out distributions that are unlike dividends. Distributions can consist of interest, dividend, other income, return of capital, etc. Other income is taxed at your marginal tax rate. To avoid any headaches when reporting taxes, buy and hold its units in a TFSA or an RRSP.
The 3% dip is an opportunity to become a part-owner in Brookfield Infrastructure and its durable assets, which generate stable, growing cash flows. In fact, the firm is so sure of the growing cash flow that it targets 5-9% annual growth of distributions.
Fool contributor Kay Ng owns shares of Brookfield Infrastructure Partners.