Best Buy: Brookfield Infrastructure Partners vs. NextEra Energy

NextEra Energy (NYSE: NEE) and Brookfield Infrastructure Partners (NYSE: BIP) both are owners of the infrastructure that ensures the smooth running of our daily lives. These physical assets are important and expensive to build (or buy). They usually provide their owners with a stable source of revenue, either because of regulation, long-term contracts or simply the vital nature of the asset, which allows tolls to be collected from individuals for their use. . But there are huge differences between NextEra and Brookfield Infrastructure, which must be understood before choosing one over the other.

1. Commercial orientation

NextEra Energy is one of the largest power companies in the United States. It operates two main businesses: regulated electric utilities in Florida and a renewable energy company that sells long-term contract energy across the country. Although the company is very well managed, NextEra is not very diversified.

This is especially true when you compare this to Brookfield Infrastructure. Brookfield Infrastructure owns utility assets, as well as toll roads, railways, seaports, natural gas pipelines and data storage assets. It also operates globally and has assets in Europe, North and South America and Europe.

If you are looking for a power company, NextEra is the game in its own right, but if you prefer a diverse collection of infrastructure, you should contact Brookfield Infrastructure Partners.

2. Company structure

NextEra is structured like an ordinary company, which is pretty simple. Brookfield Infrastructure is a limited partnership, a much more complex entity. For starters, limited partnerships have tax problems, including the fact that they do not play well with tax-advantaged retirement accounts. You should probably consult a tax advisor if you own Brookfield Infrastructure.

In addition, Brookfield Infrastructure is managed by Brookfield Asset Management, its general partner. This is neither inherently good nor bad, and allows Brookfield Infrastructure to weigh all its weight due to the size and strength of its parent company. However, it is a more complex entity that forces investors to control Brookfield Infrastructure and Brookfield Asset Management, which manages a number of partnerships. NextEra, for reference, does not have a parent company, although it manages a limited partnership itself. If you like keeping things simple, NextEra wins here.

3. Dividends

One of the main reasons to consider infrastructure like utilities is income. Brookfield Infrastructure has a distribution yield of 4.5%, double what you would get from a S & P 500 Index funds. It's not bad, even if you can get higher yields and still relatively safe in the market. However, it exceeds the yield of 2.3% of NextEra.

Brookfield Infrastructure has increased its dividend for 12 consecutive years. NextEra has rewarded investors with 25 years of annual increases. That said, Brookfield Infrastructure did not exist as long as NextEra, so both partners are really up to it.

Brookfield also has a stated distribution policy of paying to unitholders between 60% and 70% of its funds from operations. Its goal is to increase the dividend from 5% to 9% each year. The annualized increase over the last decade is about 12%, so it has exceeded this long-term goal. NextEra has no stated goal for long-term dividends, but it expects dividend growth of between 12% and 14% in 2019 and 2020.

4. Growth plans

Dividend growth, the leader in the utilities sector, will come from two sources. Firstly, its payout ratio is around 60%, which leaves it free to increase the dividend at a rate higher than that forecast for earnings growth of 6% to 8%. Earnings growth, in turn, is supported by capital expenditures and plans for upgrades in its regulated operations and the addition of new assets in its renewable energy businesses. Together, the utility plans to spend about $ 13 billion a year until 2022. It offers material visibility and a long tradition of solid execution.

Brookfield Infrastructure Partners' approach is a little different. It is an active asset manager who seeks to acquire disadvantaged businesses. He then works hard to manage them well, improving operations along the way. Then, when assets become expensive, Brookfield Infrastructure Partners will often sell assets to fund the purchase of older assets. Although internal expenses are modest each year, the main story is that Brookfield Infrastructure owns and actively manages a portfolio of infrastructure assets. It is much harder to understand what the future holds and growth can be uneven as acquisitions can be large and sporadic. The partnership has done a good job of growing over time, but it takes a little more faith to own than NextEra.

5. leverage

Although you can spend a lot of time dissecting balance sheets here, an overview is more than enough to show the difference. The debt / EBITDA ratio of NextEra is about 3.7 times higher, standing near the bottom of the utility scale. Brookfield Infrastructure's debt to EBITDA ratio is approximately 5.2 times higher, among other things. In simple terms, Brookfield uses debt more aggressively to grow its business. If you are looking for a conservative investment, NextEra would be the best option.

NEE financial debt to EBITDA (TTM). Data by YCharts.

6. evaluation

NextEra's dividend yield is close to its lowest level in 20 years. Its price / sales and book value ratios are well above their five-year average. It is an expensive title today, largely because of the success achieved in the growth of its business and its dividend. Investors looking for a good deal will not be interested. Those looking for a story of dividend growth can be, but that requires keeping your eyes wide open on the valuation front. Investors are paying for quality and growth prospects here.

Brookfield Infrastructure's performance has been at the lower end of its range since its IPO at the end of the last decade. That said, its price-to-sales ratio is below its five-year average and its price-to-book ratio is also above its five-year average. It would be difficult to call Brookfield Infrastructure cheaply, but that does not seem very expensive either. Of the two, it is probably the best deal.

What to do here?

The truth is that NextEra and Brookfield Infrastructure are well-managed entities. They take different approaches to infrastructure, but investors would not make mistakes in owning them. However, NextEra is much more targeted, has a much lower return and seems expensive today. Although investors with dividend growth may be interested, most others will likely want to think about buying at current prices. Brookfield Infrastructure has a return that will attract more investors in revenue, but it uses more leverage, has a less certain future because of its portfolio approach and is not really cheap. Income-oriented investors may want to take a look, but there are other infrastructure options that offer higher returns and solid track records that may be more appropriate for the future. the current time.

In other words, neither NextEra nor Brookfield Infrastructure are clearly winning here, although Brookfield seems to have a slight advantage because of its more reasonable valuation. In fact, before making a final call, you may want to take a closer look at Enterprise Products Partners products, Magellan Midstream partners, or some of the other mid-range players that are out of place. They are more focused infrastructure owners, but they appear to be better values ​​and generally have more generous returns.