All of the Brookfield Asset Management Inc. subsidiaries are amazing companies to own because the dividends they pay are incredibly lucrative and generous. And when they are able to, they increase the dividends quite handsomely. According to RBC Capital Markets, in an interview with the Financial Post, Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) could increase its dividend by as much as 12% in the beginning of 2017.
The justification for this significant increase in dividend is relatively straightforward: Brookfield has been making a series of smart investments over the past year that, in 2017, will provide a significant bump in cash flow, thus allowing the business to pass on more dividends to its investors.
In Q3 alone, the company closed US$660 million in acquisitions. Brookfield acquired ports in Australia, a gas storage business in North America, and a Peruvian toll-road system. Management fully expects these acquisitions to generate attractive yields starting in the fourth quarter (which we’re in right now).
Brookfield is also working to acquire the natural gas transmission assets owned by Petroleo Brasileiro SA Patrobras. With its consortium of investors, 90% of the business will be acquired for US$5.2 billion. Brookfield will pay at least US$825 million for a 20% stake, but it could look to acquire more. This is a solid deal for the company because the pipeline, which acts like a toll booth for gas, already has existing contracts that account for 100% of capacity. That’s immediate cash flow generation.
All told, the company has an incredibly diverse portfolio of assets in core infrastructure projects. The breakdown is as follows: 37% in transportation, 39% in utilities, 16% in energy, and 8% in communications. Half of its revenue comes from contractual sources and 41% comes from regulated sources, so revenue is predictable.
Going forward, management anticipates that it will invest anywhere from US$500 million to $1 billion every year over the next three to four years to expand its holdings either through organic growth or outside acquisition.
The reality is that Brookfield fits a niche that the world needs. With governments unable to invest in core infrastructure, private institutions like Brookfield are able to, generating considerable profits for its investors.
But we come back to the topic of whether or not Brookfield can increase the dividend by 12% in the beginning of 2017. Presently, it pays US$0.39 per quarter to its investors, which is good for a 3.5% yield. With all of the acquisitions it has been making in assets that already kick of cash flow, I see no reason why the company can’t increase the dividend.
Management has always planned to push the yield up by anywhere from 5% to 9% every year just based on the acquisitions it makes. A 9% increase to the dividend would make it US$0.425 per quarter. However, if management can push it up to 12%, investors could expect a yield of US$0.436. According to the analyst at RBC Capital Markets, if this dividend increase happens, it’ll likely occur in February (when the next earnings results are announced).
Whether it’s 5%, 9%, or 12%, Brookfield Infrastructure is in a great position thanks to the high-quality assets it owns. And with it continuing to expand its portfolio, I expect the yield to consistently grow. This is a solid buy for me.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned. The Motley Fool owns shares of BROOKFIELD ASSET MANAGEMENT INC. CL.A LV. Brookfield Infrastructure Partners is a recommendation of Stock Advisor Canada.