After the Spinoff: Which Brookfield Stock Should You Buy?

Brookfield Asset Management provides both a nice dividend and growth potential, but Brookfield stock appears to be more undervalued right now.

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Brookfield Corp (TSX:BN) just spun off its asset management business as Brookfield Asset Management (TSX:BAM) at the end of 2022. Which Brookfield stock should you buy?

At a high level, here is what you’re getting in each of the TSX stocks after the spinoff.

Brookfield Corp

Brookfield is focused on growth by doing what it does best — owning and operating real assets to deliver solid risk-adjusted returns through economic cycles. For reference, its 10-year annualized returns are about 14.6%.

It has a perpetual capital base of about US$125 billion deployed across three key pillars: asset management, insurance solutions, and its operating businesses. This capital generates free cash flow of about US$5 billion every year. Its growing distributable earnings are supported by stable cash flows that are inflation-linked. So, it has been benefiting from the higher inflation rate recently.

Brookfield has a presence globally. It has over 2,000 investment and operational professionals and approximately 180,000 operating employees in 30 countries on five continents. Because of its global diversification and tentacles in essential businesses that help make up the backbone of the economy, investors can count on the staying power of the business. It’s also able to invest in areas (geographies and industries) that provide the best risk-adjusted returns.

Brookfield Asset Management

Brookfield Asset Management is a leading alternative asset manager that has more than US$750 billion of assets under management across renewable power and transition, infrastructure, private equity, real estate, and credit.

It manages a range of public and private investment products and services for both institutional and retail investors. From this, it earns management fees. For earning certain return targets for its funds, it has often earned additional performance fees as well.

Which Brookfield stock should you buy?

Whether you buy Brookfield, Brookfield Asset Management, or both depends on the kind of investor you are. Total-return investors who take an active investing approach and can stomach market volatility may be able to shoot for higher returns by investing in Brookfield stock. Investors who prefer more dividend income would have an affinity towards BAM stock.

Brookfield is more diversified and owns large stakes in Brookfield Asset Management and its other publicly listed subsidiaries, including its renewable power and infrastructure operating businesses. It is primarily a growth stock for which investors can earn tax-deferred growth. That is, you only have a big tax bill from capital gains when you take profit, as its dividend yield is small at about 0.8%.

So, the stock is more subject to market cycles. If you can time the market, you can capitalize on outsized returns from capital gains from riding on market cycles. That is, selling at highs and accumulating shares at lows. Right now, the stock appears to be undervalued. Analysts believe Brookfield stock is discounted by about 30-50%.

Brookfield Asset Management offers both growth and a nice dividend yield. Management believes it can double the size of its business over the next five years, pushing its fee-bearing capital to roughly US$1 trillion. That’d be an amazing growth rate of close to 15% per year!

Since it’s a capital-light business, the dividend stock has a target payout ratio of about 90%, and it’s able to pay out a bigger dividend yield of about 4.3% currently. With a bigger dividend, investors can get a more reliable return through market cycles.

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 Kay Ng has positions in Brookfield and Brookfield Asset Management. The Motley Fool recommends Brookfield, Brookfield Asset Management, and Brookfield Corporation. The Motley Fool has a disclosure policy.

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