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Brookfield Infrastructure Partners' Strategy Shift Is Beginning to Pay Big Dividends

Matthew DiLallo, The Motley Fool

Brookfield Infrastructure (NYSE: BIP) recently reported excellent second-quarter results. The global infrastructure operator's funds from operations (FFO) jumped 15% on an absolute basis and 13% per unit. That's a notable acceleration from the first quarter when FFO rose 5% overall and about 4% on a per-unit basis.

Brookfield's management team spent some time on the second-quarter conference call detailing what drove this acceleration. One of the key takeaways was that the company is just starting to get revved up, which suggests it should continue growing at an accelerated rate in the coming quarters.

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Our portfolio repositioning is working as planned

CFO Bahir Manios started the discussion on what drove the quarter. He said: "These second-quarter results are the first to reflect the full benefit of the most recent phase of our asset rotation strategy. To summarize this strategy, last year we generated combined proceeds of $1.5 billion from selling an interest in a mature de-risked electricity transmission business in Chile and completing a financing at our Brazilian regulated gas transmission business."

As the CFO notes, Brookfield is finally starting to see the payoff of its asset rotation strategy. While the moves it made initially weighed on its results as it looked for opportunities to put the money to work, it recently closed several acquisitions.

Manios drilled down into how that affected the company's results:

These monetizations occurred at values that represented a 7% average FFO yield and the proceeds were subsequently redeployed into seven higher-growth businesses across our utilities, energy, and data infrastructure segments that generate, on average, a going-in FFO yield of 12%. The value created through this phase of capital recycling is meaningful. In this quarter alone, it contributed incremental FFO per unit of almost $0.05 on a per unit basis. And on an annualized basis, it should benefit our FFO by approximately $75 million.

Brookfield's wheeling and dealing over the past year boosted its per-unit results by 6% during the second quarter, which should translate into a similar annualized increase. That's a notable uptick, considering the company didn't add any new capital. It simply reallocated money from one opportunity to several better ones.

Our organic growth initiatives are also paying off

Next, Manios pointed out that the company "[b]enefited from both organic growth and the contributions from capital recently deployed in new investments." He continued:

Our FFO also grew organically by 10% relative to the prior year, marking the second consecutive period of growth that exceeded our annual long-term target of 6%-9%. Contributing to this outsized growth was our volume increases that averaged 2% across our business, inflation indexation of approximately 3%, and earnings generated from the commissioning of almost $650 million of capital expansion projects that were completed during the last 12 months.

While acquisitions have historically fueled Brookfield's distribution growth, it wants organic growth to be the primary driver going forward. In the company's view, three factors should support 6% to 9% annual organic cash flow growth, which should allow it to increase its distribution by 5%-9% per year:

  1. Inflationary price increases of 3% to 4% per year on its existing contracts.
  2. Volume growth as the global economy expands, probably adding 1% to 2% of incremental cash flow annually.
  3. Expansion projects that should boost cash flow by 2% to 3% per year.

The company outperformed those expectations during the second quarter. as recently completed expansion projects added 5% to the bottom line, which complemented its strong volume growth and inflationary price increases.

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There's more where that came from

Brookfield anticipates that it should be able to continue growing at an accelerated pace for the foreseeable future. CEO Sam Pollock noted on the call:

We expect FFO to benefit from continued organic growth as well as the contributions from acquisitions that have or are expected to close in the third quarter. And this includes the second phase of our Western Canadian midstream business as well as the New Zealand data distribution business that we just acquired. We expect the exit run rate in 2019 for our FFO per unit to be over 20% higher than it was at the time we sold our Chilean electricity business, which was over a year ago. The pace of new investment activity this year has surpassed our expectations... and we anticipate this momentum to continue in the foreseeable future.

Brookfield has a few more deals that will close during the third quarter that will provide an additional boost to its near-term results. Meanwhile, it's already well under way with the second phase of its capital rotation strategy. It expects to sell more than $700 million in assets over the next six months. That will help it fund the $1.1 billion of new opportunities it has secured over the past few months. This number could grow since the company's acquisition pipeline remains healthy. On top of that, it has $2.2 billion of organic expansion projects on track to start up over the next three years.

An excellent stock for the long term

Brookfield Infrastructure has tweaked its growth strategy in recent years. The company has pivoted from making acquisitions that it paid for by issuing new units to ones funded by asset sales. That's enabled it to grow cash flow at a faster per-unit rate, especially when factoring in its organic growth. Those dual fuels should allow the company to continue increasing its already attractive 4.5%-yielding payout at a healthy pace in the coming years. 

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Matthew DiLallo owns shares of Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com