Top picks 2012: Brookfield Infrastructure

by Gordon Pape, editor The Canada Report

2012 will be a year of uncertainty. Since I am a conservative investor by nature, I am therefore selecting a security with limited downside risk, stable assets, and good cash flow.

Brookfiled Infrastructure Partners L.P. (BIP) is a Bermuda-based limited partnership that consists of utilities and timber assets, as well as access fees for the transportation, storage and handling of energy, freight and bulk commodities

Major assets include 9,600 miles of natural gas pipeline, mainly in the U.S. Midwest; 3,200 miles of rail lines in Western Australia; 20 port facilities in Great Britain; and a 71% interest in the Dalrymble Bay Coal Terminal in Queensland, Australia, one of the world's largest coal export terminals.

The partnership also owns electricity transmission lines in Chile and Canada, electricity and gas connections in the U.K., and timber lands in western Canada and the U.S.
Clearly, this is a large and well-diversified international business, operating in several key sectors in politically stable countries.

I like BIP for stability and cash flow – qualities which should support the share price in 2012 and provide some upside if economic conditions improve. The units currently pay quarterly distributions of $0.35 ($1.40 annualized) to yield 5.3% at the recent price.

Management's target is to pay out between 60% and 70% of funds from operations (FFO) but the business has been doing so well that Brookfield increased the distribution twice in the first eight months of 2011. Even with those increases, the payout rate is well below target.

Growth potential is another important reason to like BIP. Some of this will be organic growth while some will be via merger and acquisition. The LP's stated policy is to actively seek acquisitions of compatible businesses.  

The risk is somewhat lower than with most stocks because of the fact that much of the cash flow is generated by regulated businesses or long-term contracts. Global diversification is another key factor and it is important to note that most of the assets are in stable countries.

Of course, the business is vulnerable to some extent in the event of another major recession, with the coal-handling facilities and the ports being particularly susceptible to a downturn.

Timber production has been negatively affected by low prices. Taking everything into account, we rate Brookfield as moderate risk.

As a limited partnership, the tax liabilities flow through to the unitholders. The partnership itself pays no tax. Brookfield is not considered to be a master limited partnership under U.S. law.

Summing up: This LP is an excellent choice for conservative investors who are content with a solid 5%-6% yield and good long-term growth potential.

Learn more about this financial newsletter at Gordon Pape's The Canada Report.