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Do you have $1,000 lying around? With higher interest rates available today, investors want to be well-compensated for the long-term capital they invest. The highest-interest one-year Guaranteed Investment Certificate (GIC) offers a rate of about 5%, while the five-year GIC rate is about 4.5%.
GICs are considered risk-free investments in that you’re guaranteed to get your principal back safe and sound. That’s not the case for stocks. In the worst-case scenario, investors could lose their entire stock investment if the underlying business goes under. Thankfully, the top TSX stock I’m going to talk about is a well-run business that shares profits with its shareholders.
Brookfield Infrastructure Partners (TSX:BIP.UN) has created wealth for long-term investors since it began trading on the Toronto Stock Exchange in 2009. Since then, it has grown investors’ money 13-fold — growing an initial investment of $1,000 into approximately $13,350.
BIP.UN Total Return Level data by YCharts
Its five- and 10-year total returns are about 14% and 8.6%, respectively, per year, growing an initial investment of $10,000 into about $37,040 and $15,090, respectively. Its three-year rate of return of 2.2% barely made investors money — perhaps investors with a sharp eye would say it, at best, kept up with the long-term rate of inflation.
Is the utility stock losing its touch? Actually, the stock peaked in early 2022 before it began a downtrend from central bank interest rate hikes since 2022. For example, in Canada, the policy interest rate rose from 0.25% to 5.0%, which is a rapid increase. Any company that’s leveraged, including BIP, which has sizeable debt, would naturally see a selloff in its stock. Generally speaking, higher interest rates mean higher interest expenses and a higher cost of capital, leading to slower growth. BIP still has an investment grade S&P credit rating of BBB+.
Operational-wise, Brookfield Infrastructure continues to do a fabulous job. For 2023, it reported funds from operations per unit (FFOPU) growth of 9% and a payout ratio of 66%, which was within its long-term target range of 60-70%. The utility reported first-quarter (Q1) 2024 results, including FFOPU growth of 8% with the help of 7% of organic growth. This is within management’s expectation of an organic growth of 6-9% per year across its diversified portfolio of global infrastructure assets.
Its Q1 supplemental information also notes that it has ample liquidity of US$2 billion. Moreover, its ongoing capital-recycling program is expected to lead to proceeds of about US$2 billion in any given year. Additionally, it targets a long-term return on invested capital of 12-15%. As well, it has a well-laddered debt profile that has an average term to maturity of about seven years with largely predictable interest expenses, as approximately 90% of its debt is a fixed rate. And it has no significant debt maturities this year. Specifically, roughly 4% of its asset-level debt will mature over the next 12 months; only half will refinance at higher rates.
Despite BIP having its debt largely at the asset level, it doesn’t change the fact that higher interest rates weigh on the stock’s valuation. This is actually good for long-term investors because they can now accumulate shares in the top utility stock at a discount and higher yield.
At $41.70 per unit, the stock offers a cash distribution yield of 5.3%. Analysts also think that’s a nice discount of over 20% with the potential for up to 30% of upside over the next 12 months. Allowing more time for the business to grow could lead to greater wealth creation.
Importantly, the utility has a track record of increasing its cash distribution. (For your reference, its five-year cash distribution growth rate is 6.3% per year.) The stock pays well for investors to sit on its shares. If it continues to grow its cash distribution at a 6% clip, the yield on cost would be over 7% in five years. Combining its attractive valuation, yield, and above-average growth prospects, BIP has the potential to outperform its peers and the market over the long run.
