Air Canada (TSX: AC) stock could potentially make you money, but it is highly unpredictable due to factors outside of the company’s control, including changes in energy prices, inflation, interest rates, and the health of the economy. At best, given its non-investment grade S&P credit rating of BB- and high levels of debt, interested investors might consider it as a speculative position to target a profitable trade.
If you want surer returns, you should consider this magnificent utilities stock instead – Brookfield Infrastructure Partners L.P. (TSX: BIP.UN). In fact, after reporting its full-year 2023 results, it just raised its cash distribution by 5.9%. As a result, at the recent price of $42.54 per unit, it offers a nice cash distribution yield of 5.1%. This growing income is something investors can depend on.
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Recent results
The global owner and operator of a diversified portfolio of quality infrastructure assets increased its funds from operations (FFO) by 10% to US$2.3 billion in 2023. On a per-unit basis, the growth was 8.9% to US$2.95, marking its payout ratio at 66% for the year, which is within its target range of 60 to 70% of FFO.
The business grows organically and by acquisitions, including the optimization of operations to add value to existing assets. For the year, organic growth was 8%, reflecting strong inflation. It also experienced volume growth across the majority of its critical infrastructure networks. Additionally, it put into service roughly US$1 billion of new capital projects that are now contributing to its earnings.
Brookfield Infrastructure is also not shy to sell mature assets so as to improve its financial flexibility to make new investments for better risk-adjusted long-term returns. For example, it “deployed over US$2 billion into new investments in the third and fourth quarter of 2023 that favorably impacted results, offset by the impact of US$1.9 billion of asset sales that primarily closed in the second quarter of 2023,” as noted in its press release.
The over US$2 billion of investments were diversified across three acquisitions, including Triton, a global intermodal logistics operation, and two massive data centre platforms that are geographically diverse. Management anticipates continued exponential growth in the digital economy, supported by the tailwinds from the 5G rollout and artificial intelligence.
Long-term returns
According to data from YCharts, here’s how an initial $10,000 investment performed between the stocks of Air Canada and Brookfield Infrastructure Partners L.P. over the last 10 years. Specifically, Air Canada stock delivered total returns of 8.8% with a lot of volatility in between, while the utilities stock generated total returns of just north of 15% per year, which is extraordinary.
This goes to show that Air Canada stock would require more attention from investors and the need to be a more active investor. In contrast, BIP can be a buy and hold investment that investors can aim to buy more on dips.
About a third of BIP’s returns come surely and steadily for investors from cash distributions every quarter. Stocks are innately volatile. We can’t avoid volatility even with a defensive stock like BIP. However, it is certainly a smoother ride than holding Air Canada.
AC and BIP.UN Total Return Level data by YCharts
At the recent price, analysts believe the top utility stock is discounted by about 19%. So, it’s worth it to consider BIP stock now and especially on meaningful market corrections. Based on the current valuation, cash distribution yield, and growth potential, it’s possible for the stock to deliver long-term returns of approximately 12 to 15% per year.
