Brookfield infrastructure (NYSE: BIP)(NYSE: BIPC) has a long history of constantly expanding its operations. The company has developed its operating funds (FFO) per share at a compound annual rate of 15% since its inception in 2009. This has allowed it to systematically increase its dividend yield (which currently hovers around 3.7%) at an annual rate of 10%.
Brookfield is set to enter its next phase of expansion, fueled by its impending acquisition of Inter-pipeline (TSX: IPL). The agreement was one of the central themes of the infrastructure company letter to shareholders for the second quarter. Here’s a closer look at why she’s so excited to bring this company into the fold.
A fierce battle
Brookfield has been trying to acquire Inter Pipeline for over a year. The company publicly unveiled its offer in February. After many back-and-forths and a rival bid from another energy infrastructure company, Brookfield emerged victorious in late July when this suitor stepped down.
Brookfield Infrastructure CEO Sam Pollock commented on the deal in the Q2 letter:
When it comes to growth initiatives, our patience paid off in our offer to privatize Inter Pipeline Ltd. (IPL). With the approval of IPL’s board of directors and advice on the merits of our offer from two distinguished proxy advisers, Brookfield Infrastructure now has a clear path to acquire IPL. If successful, Brookfield Infrastructure will deploy approximately $ 2 billion of equity capital in a high quality Canadian middleman company. Completion of this acquisition is expected in the third quarter and will mark the start of the next period of expansion of our business, which is expected to generate a strong increase in FFOs per unit.
As Pollock noted, Inter Pipeline is a game-changer for the company as it sets the stage for its next phase of growth. That’s why he fought so hard to make a deal.
What Inter Pipeline brings to the table
As an income-driven business, one of Inter Pipeline’s greatest strengths is its contractually guaranteed cash flow. It operates a diverse portfolio of energy infrastructure, including pipelines, bulk liquids storage terminals and natural gas liquids processing plants. Most of these assets generate stable cash flows supported by cost of service and other fee-based contracts.
But that was not the only reason Brookfield wanted to acquire Inter Pipeline. Inter is also investing in a new petrochemical plant which will be operational in the coming months. The project will significantly increase its cash flow, with most of the revenue supported by fee contracts. In addition, Pollock noted in the letter to shareholders that “during our extended period of due diligence, we have identified a number of strategic priorities for the company that will help drive top line growth for the years to come. to come”.
By combining Inter Pipeline’s growth with Brookfield’s other organic growth initiatives, which include a backlog of more than $ 2 billion of projects, the company says it expects annual organic growth to equal or above the upper limit of its target range of 6% to 9% in the short term. This is in addition to the short-term boost fueled by acquisitions that he will get by investing $ 2 billion in the privatization of Inter Pipeline. The company noted that mergers and acquisitions could add up to 5% to its FFO per year, although it continues to sell assets as part of its capital recycling program to fund new, more profitable investments like Inter. This should give the company plenty of fuel to continue growing its dividend, which it plans to increase at an annual rate of 5-9%.
A growth engine at full speed
Brookfield Infrastructure has shown annual growth in FFOs and double-digit dividends for more than a decade. While the pandemic and some asset sales slowed its pace last year, it is hitting the accelerator in 2021, fueled in large part by the Inter Pipeline deal. This transaction will give acquisitions a boost this year and further organic growth over the next two years, allowing Brookfield to grow at a rapid pace.
Add that growth to its high-yield distribution, and the company has the fuel to continue to generate above-market total returns for years to come, making it a great buy these days.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.Source link