Include this Infrastructure Stock when Building Your Portfolio

With the market hitting record highs daily, finding compelling new opportunities at attractive entry points has become increasingly challenging.

Brookfield Infrastructure (“BIPC”), which hit almost $70 as recently as March, has pulled back just about 25% the last several weeks to $53.34 today. (Disclosure: Clients, Jeff Pollock, and Sunni Schneider have a financial interest in BIPC as shareholders, but no compensation was received for this content.)

As its name implies, the company builds all kinds of infrastructure. With high government debt burdens, the demand for private companies to build modern infrastructure to accommodate artificial intelligence (“AI”) is growing by the day.

Its four main areas are transportation, utilities, midstream, and data. This includes stuff like the toll roads and railroads that move goods; the power lines and pipelines that deliver energy to your home; and the cell towers that keep your phone connected. They’ve also become a major player in the AI buildout by constructing massive, high-powered data centers.

So, why is BIPC down?

Few securities track interest rate swings as sensitively as BIPC. When the U.S. Federal Reserve held rates steady in March, citing a “perfect storm” of energy prices and geopolitical strife, it effectively froze any hope for a near-term rate cut. Today, no rate cut is expected until 2028. For a company that relies on debt to build infrastructure, a “higher for longer” stance makes its stock less attractive to short-term investors.

Nevertheless, we’re using this opportunity to add to our existing position.

The stock is inexpensive relative to its historical valuation. In fact, it’s 25% cheaper than the valuation it’s traded at since the pandemic (10x price-to-funds from operations today). While we wait for its stock price to recover, we’re getting paid almost a 5% dividend to wait. And the company plans to grow that dividend 5-9% every year (including a 6% hike this past January).

At the end of April, the company reported good quarterly numbers that exceeded our expectations. Its funds from operations (which is a less commonly used financial metric that really just means “cash flow”) grew 10% compared to the year before. A major bright spot was the explosive numbers in the Data segment, which posted +46% growth year-over-year, and management expects this momentum to continue.

Despite these solid quarterly numbers, the stock dropped almost 11% that same day. The reason is that management is exploring simplifying the corporate structure. Right now, you can buy BIPC and receive a simple dividend, or you can buy BIP.UN and receive a mailbox full of complicated tax slips. Traditionally, BIPC has traded at a “convenience premium” because it doesn’t come with the tax headaches of its partnership cousin, BIP.UN. Now that management is looking to consolidate the two, that premium is evaporating as the prices converge. However, we prefer a simplified corporate structure because it will attract major institutional buyers and inclusion in major indexes.

With 90% of its cash flow contracted and 60% of its business tied to the digital economy, BIPC offers predictability in an uncertain market. We are actively adding to our position as the company builds the essential infrastructure of the future.

-written by Jeff Pollock