James Bray
As early as December 23, 2022, we purchased a large position in Brookfield Infrastructure Partners (NYSE: BIP)(NYSE:BIPC) preferred unit (NYSE: BIP.PR.A), with a price of $16.63 per unit.However, we recently sold our position at $18.70 per unit, locking in a nice price The total return, including distributions, was 22.1% (17.3% annualized), and we’ll detail why in this article.
BIP/BIPC Overview
We bought on the dip last October when BIP units were trading below $20, and we’ve made huge profits from it ever since. Shortly after taking our position, we wrote an in-depth article responding to some of the other criticisms leveled against BIP/BIPC at the time. In short, the criticisms we address are:
- BIP is overrated
- BIP pays exorbitant fees for its distribution
- BIP does not actually create unitholder value
You can read our article If you’d like to read our detailed response to these claims, please see the link above, but the good news is that none of these issues will actually affect preferred units, so whether you agree with our views on BIP/BIPC or not, preferred units should be considered Invest for a fairly safe income because:
- BIP has a strong balance sheet with a BBB+ credit rating, relatively low corporate-grade debt (the balance is non-recourse asset-grade debt), 90% of its debt has fixed interest rates, its average maturity is 7 years, and it has only 5% of debt is due within the next 12 months and it has $2.8 billion of available liquidity. This means the risk that it experiences sufficient financial distress to threaten its preferred shares is fairly low.
- Brookfield likes to use preferred stock to fund growth investments, so maintaining the sanctity of its preferred stock distributions and treating preferred unitholders’ rights is critical to being able to continue to issue preferred stock at reasonably attractive prices.
- BIP has a very diversified portfolio that includes relatively defensive assets, strong counterparties, and long contract durations.
- BIP also continues to grow its unit cash flow rapidly, which also provides additional protection for BIP’s preferred shares.
Why we sell BIP.PR.A
BIP/BIPC remains a solid diversified infrastructure business that is well managed and has attractive long-term growth potential. Additionally, Brookfield is an outstanding infrastructure operator and investor, allowing it to continue to generate attractive returns on investment and run a fairly aggressive capital recycling business, further accelerating the compounding process. BIP also offers a fairly attractive current yield. Therefore, we are long common stocks, albeit a fairly small position.
However, despite our previous large position, we are no longer long preferred stocks. The reason behind this was entirely due to its valuation, because when we sold it, it was yielding less than 7% and the federal funds rate was less than 150 basis points lower. While a rate cut by the Fed does remain a possibility at some point this year, the spread between effective perpetual preferreds and risk-free short-term cash has become so narrow that there is no reason to hold on to this investment.
Given that when we entered this transaction, there were several other similarly high-quality preferred stocks (such as Brookfield Renewable Preferred Stock (BEP.PR.A)) and bonds yielding well above 7%, and there were This is especially true for some high-quality preferred stocks. Conservatively covered common stocks that offer similar or even higher dividend yields than BIP.PR.A have also grown their payouts at a faster rate than inflation (e.g., Enterprise Products Partners (EPD) and Enbridge (ENB) ).
Therefore, from a risk-reward perspective, it no longer makes sense for us to continue to hold BIP.PR.A, although we would certainly be happy to buy back on any future dips.
Important points for investors
We remain bullish on BIP/BIPC and currently have a Buy rating. Additionally, we have a relatively small size position in BIP units and would be happy to expand that position further into a larger position if it fell back to the low to mid-$20s as we did last October. However, we’re much less bullish on the Series A preferreds because their sub-7% yield relative to rates elsewhere in the market simply isn’t attractive enough for long-term fixed-income preferreds. Still, we like the quality of the business and think these preferreds (as a small part of the BIP capital stack) provide fairly safe passive income, so if prices fall back into the $17 range or below in the future, we’d Would love to buy Series A first.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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