The ongoing market volatility allows investors to go bottom fishing and buy undervalued stocks trading at a significant discount to their intrinsic value. In the last two years, debt-heavy companies, part of sectors such as energy, infrastructure, industrials, and real estate, have trailed the broader markets due to headwinds such as rising interest rates and inflation.
Generally, a higher cost of debt results in higher interest payments for companies. This means investors will have to account for lower profit margins and narrowing cash flows, which will limit a company’s ability to reinvest in growth, target acquisitions, and lower balance sheet debt.
One such quality beaten-down TSX stock is Brookfield Infrastructure Partners (TSX:BIP.UN), which trades 35% below all-time highs. However, this pullback allows you to buy a blue-chip stock at a discount and benefit from a forward dividend yield of 6%. Let’s see why BIP stock is worth investing in right now.
A $500 investment in BIP’s IPO would be worth this much today
Investing a small sum of $500 every month can help you build a retirement nest egg over time. For instance, if you allocate $500 each month in an asset class that helps you generate 10% annually, your portfolio would be worth close to $$1.14 million at the end of 30 years. Now, if annual returns increase to 12%, your portfolio would balloon to $1.76 million.
The S&P 500 index has returned 10% annually for the last several decades after adjusting for dividend reinvestments. So, you need to identify stocks that can consistently beat the S&P5 500 index, which is not an easy task.
Brookfield Infrastructure Partners is one such TSX dividend stock that should outpace the S&P 500 index in the upcoming decade. Shares of the Canadian infrastructure giant went public in January 2008 and have since returned 477% to shareholders. After adjusting for dividends, cumulative returns are much higher at 1,110%.
So, if you brought $500 worth of BIP shares soon after its initial public offering, your investment would have risen to $6,000 today. This means that BIP stock has returned over 15% annually in the last 16 years, comfortably outpacing the broader indices.
Is BIP stock worth investing in right now?
Brookfield Infrastructure owns and operates a globally diversified portfolio of cash-generating assets such as railroads, data centres, pipelines, toll roads, and more. Despite an uncertain macro backdrop, BIP increased its funds from operations (FFO) per unit by 9% year over year. In the first two months of 2024, it raised US$550 million of proceeds from capital recycling initiatives, the proceeds of which would be used in other growth projects. BIP expects to grow dividend distributions over time due to organic growth and accretive acquisitions.
Since 2009, BIP has increased its FFO by 15% annually, while dividends have increased by 10% each year. The company ended 2023 with an FFO of US$2.95 per share while it paid US$1.53 in dividends, indicating a payout ratio of just 52%.
Priced at just 9.5 times trailing earnings, BIP is confident of growing its distributions between 5% and 9% annually going forward, making the stock attractive to income and value investors.
