Brookfield Infrastructure could produce robust returns in the coming years.
Brookfield Infrastructure (BIPC 0.47%) (BIP 0.23%) has been a standout dividend stock since its formation 15 years ago. The global infrastructure operator has increased its payment every year, growing it at a 9% compound annual rate. Meanwhile, its funds from operations (FFO) per share has grown at an even faster 15% compound annual rate.
The company expects to continue growing briskly in the coming years. Powering that view is the truly massive investment supercycle it sees ahead for global infrastructure.
Setting the stage
CEO Sam Pollock wrote about the global infrastructure investment landscape in his third-quarter letter to investors. He penned in his letter, “In the next 15 years, we believe the world needs approximately $100 trillion to maintain, upgrade and build infrastructure.” That’s a staggering amount of capital spending. The biggest factors driving that view “are tailwinds created by artificial intelligence (AI) and associated power demand,” wrote Pollock.
There are two underlying themes at play. First is the massive buildout of digital infrastructure to support AI. Pollock wrote, “AI infrastructure is emerging as a new digitalization-themed asset class encompassing semiconductor manufacturing, compute-as-a-service, energy management, autonomous transportation, robotics and more. Combined, this represents a potential market opportunity of more than $8 trillion over the next three to five years.”
The second theme relates to the first. Pollock highlighted, “As the demand for AI utilization surges, so does the power demand, with AI chips requiring up to five times the power of standard chips.” Those chips will reside in massive data centers, which will consume a tremendous amount of electricity. Given climate change concerns, that power must come from lower-carbon energy like natural gas and renewables.
Capitalizing on both sides of the trend
Few companies are better positioned to capitalize on this $100 trillion investment megatrend than Brookfield Infrastructure. The globally diversified infrastructure company operates utilities, energy midstream, transportation, and data infrastructure assets. More than 60% of its funds from operations (FFO) currently come from businesses that will benefit from the digitalization and decarbonization trends.
Those trends are already powering new growth opportunities for Brookfield Infrastructure. Pollock wrote:
Embedded within our business is a record backlog of organic growth projects of nearly $8 billion. We additionally have over $4 billion of incremental organic growth projects that our platform businesses are advancing, which comprise our “shadow backlog” and represent projects that have not yet reached final investment decision or are expected to be developed over the next three-to-five years. This is the highest level of investment activity seen within our businesses, and we expect it to accelerate.
Data infrastructure projects currently comprise the bulk of its secured backlog at $5.5 billion. That includes investing $3.9 billion into two U.S. semiconductor fabrication facilities that Intel is building. Brookfield is also investing $1.2 billion to expand its global data center platform. In addition, the company is investing capital to expand its utilities platform and midstream operations to support the growing demand for natural gas.
On top of its visible organic growth drivers, Brookfield expects to continue recycling capital into new investment opportunities with greater long-term growth potential. It has reached its goal of securing $2 billion in proceeds from capital recycling activities this year and expects to generate another $5 billion to $6 billion over the next two years. That will give it the funds to capitalize on new investment opportunities it sees ahead. Pollock noted:
From a deployment perspective, the growth outlook for our business is strong. Industry trends are better than ever, with digitalization, decarbonization and deglobalization driving the massive infrastructure supercycle. Our investment pipeline is as big as it’s been in two years, and it continues to grow.
Robust growth ahead
Brookfield believes these catalysts should help drive meaningful cash-flow growth in the coming years (10%+ FFO per share growth annually). That will give it the fuel to continue increasing its nearly 4%-yielding dividend, which it aims to grow by 5% to 9% per year. That income and robust growth rate could easily enable it to produce total annual returns in the mid-teens over the long term. That makes it look like a great stock to buy and hold to cash in on this investment supercycle.
Matt DiLallo has positions in Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, and Intel and has the following options: long January 2025 $30 calls on Intel, short January 2025 $30 puts on Intel, short November 2024 $45 calls on Intel, and short October 2024 $45 calls on Intel. The Motley Fool has positions in and recommends Intel. The Motley Fool recommends Brookfield Infrastructure Partners and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
