Global infrastructure giant Brookfield Infrastructure Partners (NYSE: BIP) has enjoyed a nice run up over the past year, rising more than 30%. Fueling that surge is a combination of election-related buying given its infrastructure focus, as well as the fact that it has delivered robust earnings growth thanks to a combination of organic expansion and acquisitions. That rally presented the company with an opportunity to cash in its high-flying valuation to sell equity, which it recently did in a transaction that will bring more than $1 billion into its coffers. The company plans to use that cash to fund its burgeoning backlog of growth projects as well as an expanding pipeline of acquisition opportunities. Here's a closer look at where the company will put that capital to work and what it means for investors.
Topping off the tank
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Brookfield Infrastructure Partners ended last quarter with $2.6 billion of available liquidity, which it expected would increase over the next few quarters because it's in the process of monetizing some mature assets. That's a large pool to work with, especially when considering how active the company has been over the past several months. For example, last year it invested $850 million in organic growth projects, and it has already spent $1.3 billion this year to acquire a stake in a natural gas transmission company in Brazil from oil giant Petrobras (NYSE: PBR). Meanwhile, the company and its partner, natural gas pipeline giant Kinder Morgan (NYSE: KMI), just recently injected $400 million into their natural gas pipeline joint venture to help refinance that entity. However, with this week's equity issuance, the company now has about $3.5 billion of liquidity at its disposal, which provides it with a significant amount of funding for future growth initiatives.
Putting it to good use
One place Brookfield noted that it plans to invest some of its available capital into is its backlog of committed expansion projects, which currently stands at $2.4 billion and is up from $2 billion at the start of the year. What's noteworthy about that decision is that Brookfield typically funds expansion projects with internally generated cash flow, with it purposefully retaining 30% to 40% of its growing stream of cash flow for reinvestment purposes. However, the company is adding new projects to its backlog at a faster pace than it's finishing them, which is a good problem to have because it implies that its growth rate is accelerating.
In fact, the company has several more opportunities coming down the pipeline, with it seeing the potential to add $1.5 billion to $2 billion of additional expansions to its backlog over the next year. For example, its joint venture with Kinder Morgan has $300 million of potential projects that could get the green light over the next year. Meanwhile, its communications platform has already secured a $50 million project, and it's working on winning concessions to invest up to $200 million in additional projects.
In addition to these organic growth initiatives, Brookfield is pursuing several acquisition opportunities. The largest in the near-term is an agreement to acquire a stake in a portfolio of communications towers in India from Reliance Telecom. The company plans to invest $200 million into that deal, which should close by year-end. Meanwhile, it has a $15 million investment in a Peruvian water irrigation system that's also on pace to close this year. On top of these agreed upon deals, the company is reportedly one of the final bidders for another tower portfolio acquisition in India. Further, one of the company's priorities in the coming years is to invest in expanding its water-related infrastructure. Given all these opportunities, Brookfield could quickly put its $1 billion cash injection to work.
It all adds up to high-end distribution growth
Brookfield Infrastructure Partners' long-term plan is to grow its earnings by a 6% to 9% annual rate, which should drive 5% to 9% annual growth in its distribution. However, what's worth noting about this forecast is that the company had only anticipated that organic growth from its capital projects would contribute 2% to 3% annual growth, while inflationary price increases and volume upside from GDP growth would generate the rest. That said, in light of the rapid expansion of the company's backlog, that forecast seems a bit light, especially given the visible pipeline of opportunities it has for acquisitions. Because of that, Brookfield appears poised to grow at or above the high-end of its forecast for the foreseeable future, which means investors who buy today could still capture double-digit annual returns, especially when factoring in the company's still compelling 4% yield.
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Matthew DiLallo owns shares of Brookfield Infrastructure Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.