Investing in quality IPOs (initial public offerings) can help you derive outsized gains within a few years. So, before investing in an early-stage entity, it’s essential to identify companies with strong balance sheets, expanding profit margins, and widening cash flows.
One such IPO was Brookfield Infrastructure Partners (TSX:BIP.UN), which went public in late 2009. Since its IPO, BIP stock has returned 633% to shareholders. After adjusting for dividends, total returns are closer to 1,360%. Comparatively, the TSX index has returned 174% to investors in this period.
It suggests an investment of $1,000 in the company soon after its IPO would be worth $14,650 today. Let’s see if this TSX stock is a good buy right now.
The bull case for BIP stock
Brookfield Infrastructure owns and operates cash-generating assets across sectors such as utilities, transport, data centres, and midstream. The transport business accounts for 31% of total funds from operations, followed by midstream, utilities, and data at 30%, 29%, and 10%, respectively.
Its base of essential infrastructure assets allows the company to generate stable cash flows, which are underpinned by contractual and regulatory frameworks. In recent years, it has benefitted from secular trends such as digitalization, decarbonization, and deglobalization.
Basically, BIP aims to own and operate a diversified portfolio of quality infra-assets that should generate sustainable and growing distributions over the long term. Brookfield Infrastructure pays shareholders an annual dividend of $2.03 per share, translating to a forward yield of 4.3%.
These payouts have increased by 12% annually in the last 11 years. Brookfield expects to grow dividends between 5% and 9% annually in the future and maintain a payout ratio of less than 70%.
Despite a challenging macro environment, BIP increased its funds from operations, or FFO, by 12% to US$2.71 per unit in 2022. Moreover, 90% of these cash flows are contracted with a weighted average duration of 11 years.
What’s next for Brookfield Infrastructure stock price?
BIP continues to showcase the resiliency of its business and increased funds from operations by 12% year over year to $554 million in the first quarter (Q1) of 2023. Its businesses met financial targets, despite tightening capital markets. The company also secured two big-ticket acquisitions and advanced multiple capital-recycling initiatives in the first half of 2023.
In April, it agreed to acquire a Europe-based hyperscale data centre platform. Further, BIP will take private Triton International, which is the largest owner and lessor of intermodal containers in the world.
BIP’s capital-recycling initiatives should help it generate US$2 billion of proceeds which may be deployed to acquire other assets. It completed the sale of two U.S. gas storage facilities and has sold seven businesses in the last four quarters.
At its current price, BIP stock is priced at 12 times forward earnings, which is really cheap. The company remains a solid long-term bet given its robust balance sheet, global economic expansion, inflation-linked contracts, and expansion projects.
Additionally, BIP’s capital-recycling strategy, where it sells mature assets and reinvests proceeds into higher-return projects, continues to drive earnings higher.
Analysts remain bullish on BIP stock and expect shares to rise 25% in the next 12 months. After accounting for dividends, total returns will be closer to 30%.
