Global infrastructure giant Brookfield Infrastructure Partners (NYSE: BIP) has lost 13% of its value this year. Fueling the company’s sell-off has been a slowdown in its growth engine due to the sale of its electricity transmission business in Chile earlier this year. That sale caused the company’s earnings to slip last quarter and could continue weighing on its financial results for the balance of the year.
However, Brookfield has gone on to sign a string of transactions that will replace all of that lost income and then some. Because of that, I think now is a great time to add to my position so that I can capture this future upside as well as lock in a higher yield, which is currently an attractive 4.8%.
The sale of its electric transmission business in Chile and a debt refinancing on its natural gas pipeline business in Brazil are having a near-term impact on Brookfield’s results. Overall, the $1.6 billion transactions will cost the company about $125 million in annualized cash flow, which is roughly an 11% hit from last year’s total.
However, the company has since announced its commitment to invest about $1.3 billion into three separate deals. First, it plans to spend $160 million on the acquisition of several data centers from AT&T (NYSE: T). That deal will enhance Brookfield’s data infrastructure business while providing AT&T with some much-needed cash to pay down debt incurred in its Time Warner deal. Second, it intends on investing $540 million for a stake in Enbridge‘s (NYSE: ENB) Western Canadian natural gas gathering and processing business. That transaction is a win-win for these high-yield stocks since it gives Brookfield a compelling growth platform while providing Enbridge with some cash to pay down debt. Finally, it’s partnering to acquire Enercare — which is a leading provider of residential infrastructure — investing about $630 million into the deal. The company expects to close most of these acquisitions by year-end, though the Enbridge transaction will take two phases, with the final one closing in the first half of next year.
In addition to these transactions, Brookfield is in late-stage negotiations on a couple of other deals. Overall, it expects to invest another $400 million into these opportunities, which are in the energy and data infrastructure segments. Add it up, and the company plans to spend $1.7 billion to capture several opportunities.
Brookfield estimates that these new businesses will produce roughly $170 million in annualized cash flow going forward, which will more than replace what it lost from the transactions it completed earlier this year. Furthermore, the company noted that these new assets should generate a substantially higher organic growth rate than it would have earned by retaining its Chilean transmission business.
An even better opportunity than before
Brookfield has taken a hit from its decision to sell its electricity transmission business in Chile as both cash flow and its unit price have fallen this year. However, that near-term pain appears to be well worth it given that the company will reinvest those proceeds into several even more compelling opportunities. Those transactions will not only further diversify the company’s cash flow but grow it at a higher rate both in the near and long term. That’s a worthwhile trade in my book.
That’s why I plan on taking advantage of this year’s sell-off to continue adding to my position. Not only can I buy an even better company for a lower price than at the start of the year, but I can lock in an even higher yield, which Brookfield seems increasingly likely to grow at or above the top end of its 5% to 9% yearly target range. Combine the company’s growing income stream to its upside, and I firmly believe that Brookfield can generate market-beating total annual returns from here.
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