Dividend potential and big challenges ahead
In recent years, one of the world's leading infrastructure companies has become synonymous with steady growth and innovation. Since its inception in 2008, the company has focused on key areas such as energy, transport and data, and has kept pace with dynamic market changes with its broadly diversified portfolio. With record investments and ambitious projects, including data center expansions and the development of sustainable energy sources, the company has become a major player in global infrastructure.
Despite the positive outlook and stable dividend, the company also faces challenges, including a decline in net profit and high debt. Yet it has been able to adapt to changing market conditions, with an emphasis on long-term investments and strategic acquisitions. Its ability to respond to global trends such as digitisation and decarbonisation suggests that it will continue to play a key role in the development of the world's infrastructure.
Company introduction
Brookfield Infrastructure Corporation $BIPC+1.4% is part of Brookfield Asset Management, a Canadian investment firm specializing in infrastructure, real estate, renewable energy and private investment management. Brookfield Infrastructure was founded in 2008 to invest in the physical assets that form the backbone of the global economy. These assets include transportation, energy, data and utilities. Brookfield Infrastructure Corporation was later formed in 2020 as a separate publicly traded company to provide investors with more direct access to Brookfield's infrastructure investments.
The firm operates globally and its investment portfolios include a variety of asset types. In the transportation sector, it invests in rail lines, ports and freight infrastructure. In the energy sector, it owns and operates electric transmission and distribution networks, natural gas pipelines and natural gas processing facilities. In the data and telecommunications sector, it focuses on data centres, fibre optic networks and telecommunications towers, which is important at a time of increasing data volumes and the need for quality connectivity. In the utilities sector, it invests in water and wastewater facilities, where it helps ensure the smooth operation of essential services for residents.
Brookfield's history dates back to 1899, when it was founded as a construction company in Brazil, focusing on infrastructure in the energy sector. Since then, the company has undergone many transformations and expanded its reach to a global level. An important milestone has been the acquisition of a number of infrastructure projects around the world, which includes the purchase of stakes in key energy networks in Europe and North America, as well as expansion into the renewable energy sector, an area of increasing emphasis for the company.
Interestingly, Brookfield Infrastructure Corporation has a strategy of long-term ownership of infrastructure assets, which means that it is not a company that speculates on short-term gains from sales. Rather, it seeks to acquire assets with long-term value that generate stable cash flows. One of the most significant acquisitions in recent years was the 2016 takeover of Australian firm Asciano, which included major ports and rail operations in Australia.
Brookfield Infrastructure Corporation's broad diversification not only in terms of geography but also the sectors in which it operates has made it one of the world's largest infrastructure players. With a portfolio comprising more than 2,000 individual assets, the company has a significant footprint on many key infrastructure projects around the world.
Dividends
Brookfield Infrastructure Corporation has a long history of dividend growth and shareholder value creation. The company was formed about 16 years ago as a spin-off from the now-famous Brookfield Asset Management and has proven to be an excellent wealth creator over that period. It has increased its dividend every year and has achieved an average annual dividend growth of 9% over the past 15 years. Moreover, its shares have outperformed the S&P 500 index, delivering an average annual return of 14.9%, while the S&P 500 index has delivered an average return of 10.8%. Today, Brookfield Infrastructure stock provides a dividend of around 4%, nearly three times the S&P 500 average.
The company's success in dividend and yield growth can be attributed to several factors. The stability of its portfolio is key. Brookfield Infrastructure operates businesses that generate stable cash flows through long-term contracts and regulated rates. Approximately 85% of its funds from operations (FFO) is also protected from inflation. This provides the company with a stable cash flow that grows by 3% to 4% annually.
The company's strong financial position is another significant advantage. Its dividend payout ratio is between 60% and 70% of stable cash flow, which is within reasonable limits, and it has a strong investment grade rating. In addition, the company regularly provides liquidity by recycling capital - using funds raised from the sale of less core assets for new investments. This financial flexibility allows Brookfield Infrastructure to invest in expansion and acquisitions. These catalysts, along with organic growth, have contributed to the firm increasing its FFO per share by 15% each year since inception.
The firm has also prepared well for the future by focusing on three key global trends: digitalization, decarbonization and deglobalization. Each of these trends represents long-term growth potential for the company.
As part of digitalization, Brookfield Infrastructure has built a big data infrastructure platform. The company has acquired several data center development platforms, cell tower operators and fiber optic networks. It is also working with Intel to build two semiconductor fabs in the US.
In the transport, energy and utilities sectors, Brookfield Infrastructure has made several strategic acquisitions to take advantage of opportunities in decarbonisation and deglobalisation. The firm is focused on acquiring scalable platforms that can be further grown by investing in capital projects and smaller acquisitions. It currently has a record $7.6 billion in projects under construction, which it expects to complete in the next two to three years. In addition, the company expects an increase in M&A activity in the second half of this year, which could support growth in 2025 and beyond.
Brookfield Infrastructure estimates that its platforms can grow organically by 6% to 9% annually through inflation-influenced rate increases, volume growth as the global economy expands, and project development. In addition, the firm sees potential for additional acquisitions that could increase FFO growth rates to double digits. This outlook is supported by the company's plan to increase its dividend, which already yields 4%, by 5% to 9% per year.
How was the company's last quarter?
Net income was $8 million, down from $378 million for the same period in the prior year. This decrease was mainly due to higher borrowing costs and one-time gains from recycling capital in 2023. On the other hand, the company reported a 10% increase in funds from operations (FFO) to $608 million, with growth supported by organic growth as well as recent acquisitions, such as logistics operations and data center investments.
The Transportation segment recorded a 60% increase in FFO, mainly due to the acquisition of a global intermodal logistics operation and an increased stake in a Brazilian rail and logistics company. Conversely, the Utilities segment experienced a 20% decline in FFO due to the sale of interests in certain businesses, including an Australian regulated utility. The Data segment reported an 8% increase in FFO due to new acquisitions, although results were partially impacted by the sale of a distribution company in New Zealand.
The company also increased its project backlog by 15% to $7.7 billion, while investing in expanding its power and data centre infrastructure. It is also expected to be more active on the M&A front in the second half of 2024 due to more favorable interest rates and growing demand for AI investments.
Recent performance
The company has shown significant growth in recent years, both in revenue and profits. Total revenue has increased from $1.43 billion to $2.5 billion between 2020 and 2023, reaching as much as $3.28 billion in the last 12 months (TTM). This consistent growth of more than 100% over four years indicates that the company is achieving success in expansion and revenue growth.
On the other hand, cost of revenues also increased, but at a much slower rate than total revenues. In 2020, cost of revenue was $527 million and rose to $778 million by 2023, reaching $1.15 billion in the latest TTM period. This demonstrates effective cost management as revenue growth far outstrips cost growth. As a result, the company's gross profit has more than doubled in the last four years, from US$903 million in 2020 to US$2.13 billion in TTM.
Operating expenses have remained relatively stable during the period under review. It was USD 33 million in 2020 and increased to USD 67 million in 2023. This growth is relatively moderate, indicating that the company is controlling its operating expenses well even as it expands its operations. Thus, operating profit grew at a rapid pace from US$870 million in 2020 to US$1.66 billion in 2023, reaching US$2.06 billion in TTM.
However, net interest expenses show a significant increase. While they were at USD 214 million in 2020, they have already reached USD 697 million in 2023 and even USD 881 million in TTM. This increase may be due to rising financing costs or higher debt levels, which pose a potential risk to the company's profitability.
On the other hand, other revenues and expenses show high volatility. While in 2022 the company reported an extraordinary income of USD 1.15 billion, in 2023 this income was only USD 13 million and even reached USD 1.01 billion in TTM. This significant volatility suggests that the firm faces various extraordinary events that have a significant impact on its financial results.
Pre-tax profit in TTM reached US$2.19 billion, a significant increase from 2023's US$974 million. This growth is the result of strong operational performance as well as exceptional earnings. In 2020, pre-tax earnings were just $37 million, illustrating a significant improvement in the company's financial health.
Balance Sheet
Total Assets has grown from $9.34 billion in 2020 to $10.18 billion in 2022, reaching $23.91 billion in the last 12 months (TTM). This growth is significant and reflects the firm's expansion, which has focused on acquisitions and investments that have led to a significant increase in its assets.
Total Liabilities Net Minority Interest have also increased, from US$9.92 billion in 2020 to US$10.54 billion in 2022 and US$19.84 billion in TTM. This growth in liabilities is in line with the increase in assets and may be the result of financing the company's expansion or an increase in long-term debt.
Total Debt increased from $4.62 billion in 2020 to $4.60 billion in 2021 and further to $12.05 billion in TTM (latest 12 months). This growth may be related to expansion or refinancing of existing obligations.
Net Debtwhich is total debt less cash and equivalents, increased from $4.43 billion in 2020 to $4.16 billion in 2022 and $11.52 billion in TTM. This increase indicates the company's increased debt burden, which may affect its financial stability.
Valuation
Brookfield…
BIPCThe price to earnings (P/E) ratio is very low, specifically 3.97. This low P/E indicates that the firm's stock is relatively cheap compared to its earnings.
The price-to-book value ratio (P/B) is high, reaching 37.94. This ratio suggests that the stock is trading at a price that is significantly above its book value, which may indicate that the market is expecting high growth or value addition that is not fully reflected in the book value.
The price to sales (P/S) ratio is 1.58. This relatively low P/S indicates that the stock is trading at an acceptable price relative to the company's earnings, which can be a positive sign for investors who focus on earnings as an indicator of future growth.
The debt to equity (D/E) ratio is very high, specifically 88.51. This high ratio indicates that the firm is heavily leveraged relative to its equity, which may signal high interest costs and potential financial stability risk.
The debt to total capital (D/C) ratio is 0.99, which shows that debt accounts for almost all of the firm's capital. This ratio confirms the high level of debt and indicates that most of the firm's capital comes from debt, which may increase financial risk.
⚠ Invest responsibly!
The information in this article is for educational purposes only and does not serve as an investment recommendation. The authors present only the facts known to them and do not draw any conclusions or make any recommendations to the reader.
Investing can be risky if you approach it recklessly. Bulios does not know your financial situation and therefore does not give specific advice and tips in any way. Stock selection, strategy and portfolio construction is an individual matter, so always educate yourself and perform your own detailed analysis before buying a particular stock.