4 Must Own Dividend Growth Stocks – Brookfield Asset Management Inc. (NYSE:BAM) – Seeking Alpha

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4 Must Own Dividend Growth Stocks – Brookfield Asset Management Inc. (NYSE:BAM) – Seeking Alpha



(Source: imgflip)

When it comes to exponentially growing both your income and wealth, nothing beats a world-class management team with a proven track record of opportunistically investing in quality, cash-rich assets and growing dividends over time.

Brookfield Asset Management (BAM) runs one of the world’s largest hard-asset (real estate/infrastructure/utility) empires, that includes several great LPs and a REIT.

I’ve written about most of these over the years, including explaining why Brookfield Infrastructure Partners (BIP) is arguably the best high-yield income growth stock in the world.

Meanwhile, Brookfield Property Partners (BPY) and its REIT equivalent, Brookfield Property REIT (BPR), are my top blue-chip REIT picks for 2019.

But the one downside to having such a vast and sprawling empire is that it can be difficult for investors to know the key differences between these four stocks. So, let’s take a look at what’s special about each, including which ones are best for income investors with varying goals, such as maximum safe yield, vs. maximum total return potential.

As importantly, learn why today is a good time to add any of these four stocks to your diversified dividend growth portfolio. That’s thanks to 11% to 22% CAGR total return potential over the next five years that is likely to handily beat what the S&P 500 can deliver.

Brookfield Asset Management: The Best Hard Asset Empire In The World

  • Who BAM is best for: total return focused investors looking for maximum capital gains
  • Who might not like it: yield and fast dividend growth-focused investors
  • Important things to remember: 15% Canadian tax withholding in taxable accounts

Brookfield’s empire dates about 120 years, though its modern incarnation started with current CEO Bruce Flatt, who’s been with the company for 29 years and has been in the top job for 15.

Flatt began in Brookfield’s real estate segment, where he proved himself a master of deep value investing, including snapping up world-class properties at fire sale bankruptcy sales. Today, he oversees over 100 managing partners and directors who specialize in pretty much every aspect of hard assets, including real estate, renewable energy, infrastructure, and private equity financing.



(Source: investor presentation)

Under Flatt’s skilled leadership, Brookfield has become the world’s largest publicly traded hard asset manager with $350 billion in assets under management or AUM.

The company has over 80,000 operating employees across an empire spanning over 30 countries on five continents and runs money for over 500 major institutional investors.



(Source: investor presentation)

It’s also a major player in the retail investing side of the business, raising permanent investment capital via its LPs and REIT, all of which it owns major equity stakes in.



(Source: investor presentation)

The LPs, of which I’m a fan and own two myself (with plans to own two more eventually), operate similarly to MLPs in that they raise capital from debt and equity markets in order to participate in BAM sourced deals.



(Source: investor presentation)

BAM gets a base management fee (typically 1.25% of assets) plus incentive distribution rights or IDRs capped at 25% of distributions above a certain quarterly threshold. The IDRs exist to give BAM incentive to achieve its long-term payout growth targets on its LPs, which run 5% to 9% for BIP and BEP, and 5% to 8% for BPR/BPY.



(Source: earnings supplement)

Thanks to its base management fees and incentive distribution rights, Brookfield’s LPs (like BIP and BPY/BPR) help generate about 50% of its total fee income.

In 2018, Brookfield raised $22 billion from its private equity business, including raising $15 billion for its largest-ever real estate fund (25% of which represents investments by its publicly traded LPs).

This brought its fee-bearing capital to a record $138 billion by the end of the year and helped fuel 26% growth in fee-related earnings. Those fees are well diversified by type, with a good mix of infrastructure, real estate, and renewable power.





(Source: earnings supplement)

Fast fee growth helped drive 27% growth in distributable cash flow, which allowed the company to continue its record of slow (7% five-year average) but steady dividend growth. FFO/share (it’s equivalent of EPS) rose 16% per share in 2018.



(Source: earnings supplement)



(Source: Simply Safe Dividends)

This brings up an important point with BAM, which is that owning this stock is about owning one of the world’s premier asset managers. While the dividend is growing steadily over time, BAM’s focus is on retaining more cash flow, so it can grow its business. A business that, due to the favorable economics of the industry, is wildly profitable. Operating margins in 2018 were 67%, thanks to Brookfield being able to amortize its administrative and operating costs (not a capital intensive business) over that massive asset base.

Basically, shareholders in BAM are buying the stock to get a cut of the overall business, which management estimates was worth $62 per share in February 2019. With shares trading at about $45 right now, management is saying BAM investors can buy $1 in value for $0.74.



(Source: earnings supplement)

And that intrinsic value per share should continue to rise quickly over time. In 2018, BAM invested $30 billion in new hard assets, including $9 billion in Q4 2018 alone.



(Source: earnings supplement)

But major M&A, which Brookfield is famous for, is just one growth avenue. Remember that Brookfield doesn’t just flip assets, it’s also a world-class operator.

The business model is based on buying assets at discounts to fair value that can generate 12+% long-term returns on investment. Brookfield’s organic growth backlog of assets it plans to improve and expand, so it can later sell at a major profit, stands at $14.1 billion.



(Source: earnings supplement)

But no growth backlog is worth a darn without access to sufficient low-cost capital to actually build it. Fortunately, Brookfield’s amazing track record, enormous size, and conservative use of non-recourse debt (more on this in a moment) mean it has a strong A- credit rating that allows it to borrow at an average interest rate of 4.5% (at the corporate level), for bonds that average 10 years in maturity.



(Source: earnings supplement)

Combined with the borrowing power of its LPs, Brookfield is sitting on $34.4 billion in total liquidity to fund that $14.1 billion backlog.

But wait, it gets better. Brookfield is a leader in hard assets, for which investor demand is booming, both on the retail and private equity side of the industry.



(Source: investor presentation)

Over the last decade, retail investors like you and I have doubled our investments in LPs like BIP, BEP, and BPY/BPR. Brookfield expects that, by 2030, the retail hard asset market will nearly double again, to $130 trillion. With its empire of LPs leading the way, Brookfield expects to take a substantial amount of this market share.



(Source: investor presentation)

But of course, retail investors, while plentiful, are just one source of capital BAM is going after. It also has a thriving business made up of institutional investors like home offices (run money for billionaires), pension funds, and sovereign wealth funds.

BAM works with 13 leading financial advisors around the world to steadily increase its number of institutional investors, which has nearly tripled over the past five years. And by 2023, management hopes to double that figure to 1,000 large institutional clients.

How big a deal are institutional investors for Brookfield? Pretty big. Consider this. In 2013, the average institutional client invested $144 million with BAM. In 2018, that figure had grown 60% to $230 million. So, BAM’s excellent reputation and stellar track record of great returns mean it’s growing the number of ways it serves, as well as gaining more assets from each over time.



(Source: Investor presentation)

That’s courtesy of generating 19% returns for investors over the past 20 years, which is 170% better-annualized returns than the S&P 500 and nearly 300% better than risk-free 10-year Treasuries.



(Source: investor presentation)

The institutional hard asset pool also doubled over the past decade and management expects it to double again by 2030. That would mean the total addressable market for Brookfield’s type of assets might hit $230 trillion. Management is trying to win 40% of that business, which means its AUM of $350 billion might grow to as large as $40 trillion in the coming decades.

Is that a realistic goal? Well, it might be a stretchy one, but given that analyst firm McKinsey estimates that, in 2018, 38% of total hard asset AUM went to the top 20 asset managers, what’s clear is that Brookfield Asset Management has a massive and long growth runway ahead of it.



(Source: investor presentation)

One that management believes can drive fee-bearing capital up to $245 billion by 2023. Due to the leverage created by its combination of base management fees and performance incentive fees, that could translate into 18% growth in fee-related earnings.



(Source: investor presentation)

Which brings us back full circle to the biggest reason to own BAM. That would be the intrinsic value of this money minting, high margin, and fast-growing business.



(Source: investor presentation)

Today, BAM estimates its intrinsic value is $62 per share. But by the end of 2023, management (which has a great track record of delivering on guidance) estimates intrinsic value will hit $118.

Even with BAM growing the quarterly dividend by just $0.01 per year, that would translate into $3.60 per share in income by 2023. Combine that with $118 per share forecast intrinsic value and it means that buying BAM today could potentially result in 21.5% CAGR, assuming that BAM ends up trading at management’s estimate of fair value. If shares trade at a premium to fair value, then BAM’s results could be even better.

But as great as it might be to earn 20+% returns over the coming years by owning this dominant asset manager (the Berkshire of hard assets), what if you need income to live off, such as in retirement? Well, Brookfield has you covered there too, thanks to its great LP offerings, of which Brookfield Infrastructure is my absolute favorite.

Brookfield Infrastructure Partners: The Ultimate Buy And Hold Forever High-Yield Investment

  • Who BIP is best for: high-yield income investors looking for generous, safe, and steadily rising tax-deferred income
  • Who might not like it: those who hate K1s with a red hot passion
  • Important things to remember: K-1 tax form means complex tax prep

Brookfield Infrastructure is similar to an MLP in that it raises external capital from investors and bond investors to fund growth via participation in BAM structured deals.



(Source: Brookfield Infrastructure Investor Presentation)

However, it’s also different in several ways, including:

  • a double passthrough structure (it’s an LP whose assets are themselves LPs) which means no UBTI making it safe to own in retirement accounts
  • lower IDR caps than traditional MLP model (though this is becoming less of an advantage now that MLPs are increasingly eliminating IDRs via simplifications)
  • ROC tax benefit on distributions is reduced by income tax liability from investor share of taxable income (so only part of the payout is ROC that reduces your cost basis)

But while some investors look at BIP’s K-1 and extra complexity due to its double pass-through structure as a deal-breaker, I am personally willing to put up with those hassles due to the overall sensational income growth and total return opportunity this LP provides.

That’s because Brookfield’s stated goal is to deliver 12% to 15% long-term total returns for all its LPs (and BPR), via a combination of safe yield + 5% to 9% distribution growth.



(Source: BIP factsheet)

As you can see, Brookfield has historically achieved or exceeded that goal, by delivering market-crushing returns that also leave most utilities and MLPs in the dust.

The key to that impressive track record (and future returns of 12% to 15%) is management’s ability to deliver strong cash flow and distribution growth.



(Source: BIP factsheet)

It does this in three ways. First, it opportunistically acquires quality, wide moat, and cash-rich assets around the world.



(Source: investor presentation)

Today, BIP owns 32 assets on five continents worth $37 billion, courtesy of numerous transformational BAM sponsored deals over the past decade.



(Source: investor presentation)

All those assets are purchased because management believes it can deliver 12% to 15+% long-term returns on investment and they represent highly stable, recurring, and recession-resistant cash flow.

  • 95% of cash flow either regulated or under long-term contract
  • 75% of cash flow indexed to inflation
  • 60% of cash flow under volume guaranteed “take-or-pay” contracts



(Source: earnings supplement)

Management’s goal is to pay out about 65% of FFO over time, (about 80% of AFFO which includes maintenance spending) and then use that 20% retained cash flow to invest in organic growth projects.



(Source: Investor Presentation)

Currently, Brookfield Infrastructure has $2.5 billion in growth capex planned for the next two to three years, which is part of plan to organically grow FFO/unit by 6% to 9% over time. The 5% to 9% payout growth target is 100% based on this organic growth potential alone. Any extra growth BIP can achieve via smart M&A is a cherry on top, that management has proven it can deliver with remarkable regularity.

Another growth catalyst for BIP is masterful capital allocation, specifically capital recycling.



(Source: Investor presentation)

Remember that what makes Brookfield so special isn’t just its ability to find great assets at bargain prices (like during recessions in various countries) but also operate them well and improve them over time. The typical acquisition is made at prices that result in 12+% long-term expected annualized returns on investment and then later those assets are sold when their future return potential declines to 6% to 10%.

Over the past decade, BIP has sold 10 assets for $3.3 billion (its share of the net proceeds) and earned 25% CAGR returns on investment. That’s literally Buffett-level returns and shows that over the past decade Brookfield’s capital allocators have been some of the best in the world thanks to their value focus and excellent operational abilities.



(Source: Investor presentation)

The most recent example of BIP’s great value creation was the $1.3 billion sale of the Transelec Chilean electrical transmission system. Brookfield bought this in 2006 and achieved an 18% CAGR return on investment after improving it and then selling it when its cash yield on investment had fallen to 7%. Those proceeds are going into six acquisitions (many which have closed recently) that offer far better yields and two to three times the cash flow growth rates.

Over the next 12 to 18 months, Brookfield is planning on $1.5 billion to $2 billion in asset sales, as part of its new plan to fund more of its future growth internally and with less equity issuances.

According to CFO Bahir Manios,

Going forward, we expect the majority of our growth to be funded by the proceeds from asset sales and cash flows retained in the business. This is different than when we started the business 10 years ago. In previous years, we issued equity to fund much of our M&A investment activities on large-scale capital projects…we may nonetheless issue equity when we have outsized investment opportunities or in circumstances when it makes financial sense to do so. But we are no longer dependent on this approach.” – BIP CFO (emphasis added)

There is good news and bad news about BIP’s switch to a more self-funded business model. On the plus side, it means less reliance on fickle and volatile equity markets for growth capital. On the downside, it will mean more volatile cash flow growth over time, including slower growth years like 2018 when the timing of asset sales/buys meant that FFO/share was flat.

But lest you think Brookfield Infrastructure’s growth days are behind it rest assured that’s not the case. The deals that Brookfield is currently closing on (or has already closed) are alone expected to result in a 20% spike in FFO/share in 2019.



(Source: Investor presentation)

And, over the long term, while BIP won’t be able to keep generating high-double-digit cash flow growth (and 11% payout growth as it has since IPO), it still remains the best high-yield income growth investment I know of.

That’s because, according to the G-20, by 2040 alone, the world will need nearly $100 trillion in new infrastructure spending. $5.4 trillion of that will be just for developed economies through 2025.



(Source: investor presentation)

For context, since its IPO BIP has invested just $8.2 billion in total capital. This shows that, while its hyper-growth days might be behind it, strong cash flow growth will likely continue for decades to come.

But thanks to its global reach as part of the Brookfield empire, Brookfield Infrastructure’s strongest growth catalysts are not just limited to its home market of North America, nor the EU or Australia (where it has tens of billions in assets).

In Asia, the middle class (defined by local PPP and discretionary income) is expected to reach 3.5 billion by 2030.

(Source: Investor Presentation)

Asia alone will need $26 trillion in new infrastructure spending by 2030. That’s why Brookfield has opened no less than seven offices in the region, including two in China, where management expects to start closing deals around 2020.



(Source: Investor Presentation)

In fact, by 2028, Brookfield Infrastructure expects 25% of its cash flow to be coming from Asia, as well as data center and telecom infrastructure (such as fiber optic lines serving 5G wireless networks).

Basically, Brookfield Infrastructure Partners is the best high-yield investment you can make if your goal is to profit from the single largest secular economic trend in human history; the rise of global infrastructure of all kinds.

Brookfield Property: The Best High-Yield Deep Value Investment I Know Of

  • Who BPR is best for: traditional REIT investors who want generous, safe and growing yield with large capital gain potential
  • Who BPY is best for: high-yield value investors looking for big cap gains potential and tax-deferred income
  • Who might not like it: yield and fast dividend growth-focused investors
  • Important things to remember: K-1 for BPY means complex tap prep

Brookfield Property is my favorite high-yield deep value blue-chip recommendation right now and is available in two forms. BPY is the LP form, offering tax-deferred distributions and a K-1 tax form.



(Source: BPY Corporate Profile)

But Brookfield endeavors to offer one-stop shopping for all income investor needs which is why, as part of the GGP acquisition last year, it also created a REIT version of BPY.



(Source: BPY Corporate Profile)

Technically, BPR is a subsidiary that BPY owns 75% of (thus BAM owns 40% of it). Its only assets are the GGP trophy retail properties, while BPY is where the LP investment portfolio is housed. However, in reality, the economic rights of BPR and BPY are identical, meaning each pays the same amount in distributions/dividends, and the payout grows at the same rate (as seen with 2019’s 5% hike for both).

This is why they trade at virtually the same price, and as far as retail investors are concerned, they may as well own the same assets. BPR is what most REIT investors will want to own, while MLP fans who don’t mind K-1 tax complexity will benefit from the tax-deferred nature of BPY’s ROC distributions.

Ok, so now that we know which version of Brookfield Property you should own depending on your needs, here’s why it deserves a spot in your diversified income portfolio.



(Source: BPY corporate profile)

Brookfield Property is what BAM set up to house most of its global real estate investments. At the end of 2018, 83% of the roughly $90 billion asset real estate portfolio consists of the core office and retail properties, which are designed to generate steady and rising rents and provides the core operating cash flow from operations or CFFO (what pays the dividend).

These are some of the world’s best trophy assets, located in major gateway cities (financial and economic hubs) and deliver 10% to 12% long-term returns on investment.



(Source: Investor presentation)

The office property side of the core business consists of 142 buildings, leased to government agencies and mostly Fortune 500 companies.



(Source: earnings supplement)

Those office properties have 93% occupancy (very strong) and generated 5.3% SS NOI growth in 2018 courtesy of rents being about 8% below market value. Thus, as leases roll off (average remaining lease 8 years), rents rise, boosting cash flow for this part of the business which represents about 40% of BPY’s assets.



(Source: earnings supplement)

The retail portfolio consists of 124 trophy malls which have average sales per square foot of $746 (up 5.8% in 2018). Brookfield owns 8% of America’s Class A malls ($500+ sales per square feet), which ended 2018 with 96.5% occupancy and 10.6% lease spreads. In other words, they represent the most premium malls in the country, located in dense, affluent areas, and when a lease expires, the new lease is about 11% higher because Brookfield’s locations are something retailers are willing to pay a premium for.

The rest of the portfolio consists of about 1,400 LP investments, where BPY takes part in Brookfield sponsored deals via equity stakes in its various real estate funds (alongside private equity institutional investors).



(Source: earnings supplement)

These are opportunistic value investments Brookfield makes targeting 20+% long-term total returns.



(Source: Brookfield Property Investor presentation)

Brookfield has a great track record of delivering on those ambition return goals, with four of its last five real estate funds expected to deliver close to or better than 20% annualized total returns.



(Source: Brookfield Property Investor presentation)

Over the years, Brookfield has diversified its LP reach and now is involved in seven different REIT industries with more likely coming as BAM gains ever more capital to manage.



(Source: Investor presentation) – 2018 LP gains of $0.61 per unit/share

It’s taken a few years for BPY’s LPs to start paying off but now investors’ share of those realized capital gains are starting to rise to significant levels.



(Source: earnings supplement)

In 2018, the $0.61 per unit in gains helped drive the payout ratio down to 60% compared to 85% based purely on rental income (CFFO).

Over the next 15 years, Brookfield expects $11 billion in cash flow and capital gains from those LP investments. But don’t let Brookfield’s wheeling and dealing throw you. The REIT/LP is planning its 5% to 8% long-term payout growth purely based on CFFO growth based on its $6 billion of organic growth backlog.



(Source: Investor presentation)

LP asset sale gains are merely part of the self-funding business model which allows Brookfield Property to execute on its growth plan without the need for raising equity capital via selling new shares/units.

By 2022, Brookfield Property plans to achieve a 78% payout ratio on CFFO alone, with LP gains helping support over $1 billion per year in organic growth spending.



(Source: Investor presentation)

In other words, despite one of the fastest dividend growth rates in REITdom, Brookfield remains dedicated to a safe payout ratio, a self-funding business model, and maintaining a safe investment grade balance sheet.



(Source: investor presentation)

A lot of REIT investors are alarmed by the high debt levels Brookfield Property maintains as part of its business model. But 95% of that debt is non-recourse, self-amortizing asset level mortgages which don’t threaten the dividend in the event that interest payments can’t be made.

That’s why the REIT maintains a BBB credit rating because the debt/capital ratio target of 50% is about average for the sector. In other words, bond investors and credit rating agencies are not worried about Brookfield’s debt and neither am I.

Rather what you should focus on is the fact that Brookfield Property, in addition to owning some of the best real estate assets in the world, is also one of the most undervalued blue-chip REITs you can find today.



(Source: Investor presentation)

Management estimates that NAV is $29 per unit/share, and today’s price of $19.5 that represents a 33% discount to book value. And lest you think that management is overvaluing its properties, rest assured it’s not. In 2018, $3.6 billion in asset sales were for 5% above book value meaning that if anything, that $29 NAV/share estimate is conservative.

That’s why management is now buying back shares/units, including $500 million worth recently in a Dutch auction that instantly boosted NAV/share by $250 million.

In other words, BPY/BPR’s biggest total return catalyst is simply its dirt cheap valuation. One that if it closes to something approaching book value in the coming years could help drive total returns of 25% CAGR.

And if the market insists on continuing to undervalued its assets, then management can divert part of its LP capital gains to ongoing buybacks that represent a 7.6% cash yield on invested capital. That’s roughly equal to the 7% to 8% cash yields Brookfield earns on its organic growth investments. But with buybacks, there is no waiting for projects to be completed the boost to CFFO/share and NAV/share is immediate and guaranteed.

Brookfield Property, which is run by some of the world’s best real estate investors/managers, is able to divert its capital anywhere it can best achieve its ambitious (and industry-leading) growth targets. The $6 billion backlog (backed by $6.7 billion in liquidity) ensures steady CFFO/share growth to drive that dividend growth of 5% to 8%, while LP investment capital can be diverted to buybacks should the market’s irrational hatred of the stock persist.

This creates a “heads I win, tails I don’t lose” situation, in which high-yield dividend growth investors can enjoy generous, safe and fast-rising income, while also potentially enjoying some of the best capital gains the market has to offer in the coming years.

Total Return Profiles: Some Of The Best Investing Return Potential On Wall Street

What drives my investing decisions and recommendations is a stock’s total return profile which consists of four things, yield, payout safety, long-term growth potential, and valuation. These are the four factors that most determine long-term returns.

StockYieldCash Flow Payout RatioLong-Term Payout Growth/Cash Flow Growth ExpectedTotal Return ExpectedValuation-Adjusted Total Return Potential
Brookfield Asset Management1.4%15%18%19.4%19.2% to 21.5%
Brookfield Infrastructure Partners4.9%72% (Pro-Forma for closing acquisitions)5% to 9%9.9% to 13.9%10.6% to 14.6%
Brookfield Property

6.8%

60%5% to 8%11.8% to 14.8%14.9% to 17.9%
S&P 5001.9%38%6.4%8.3%2% to 8%

(Sources: earnings supplements, Simply Safe Dividends, Multpl.com, management guidance, F.A.S.T Graphs, Morningstar, Analyst Estimates)

As you can see, BAM’s low yield is not exciting to many income investors, nor is that 7% historical payout growth rate. In fact, BAM’s dividend growth is basically matching its LP’s while offering far less income.

But as I explained earlier owning BAM is all about owning a piece of one of the greatest profit minting businesses on earth. One with a decades-long growth runway that hopefully closes the share price gap with management’s estimated intrinsic value ($62 today, $118 in 2023).

BIP and BPR/BPY are where high-yield investors can look to for immediate income. And at 5% to 8% long-term payout growth for BPR/BPY and 5% to 9% for BIP, that high-yield and fast growth should combine to generate solid double-digit total returns as well, even assuming no return to fair value.

But more important than strong return and growth potential is the fact that all three Brookfield stocks offer very safe income. That’s both on a payout ratio basis and courtesy of strong balance sheets.

StockLeverage RatioInterest Coverage RatioCorporate Leverage RatioCorporate Interest Coverage RatioS&P Credit Rating

Average Interest Rate

Brookfield Asset Management10.81.01.515.2A-4.5%
Brookfield Infrastructure6.72.91.227.8BBB+5.0%
Brookfield Property10.61.11.023.8BBB4.5%

(Sources: Earnings supplement, Gurufocus, Fast Graphs)

I’ve already explained how BPY/BPR uses non-recourse debt, and that also applies to the entire Brookfield family of LPs and BAM itself. 95% of BPR/BPY’s balance sheet is non-recourse debt, the same is true for BAM, and BIP’s debt is 81% non-recourse.

This is why all three have strong credit ratings and low borrowing costs, ensuring highly profitable investments that allow for strong cash flow and payout growth rates.

Finally, there’s valuation to consider. I’ve already explained how BAM and BPY/BPR are potentially highly undervalued. While BIP isn’t trading at nearly the same discount, when adjusted for valuation, total return potentials for all three stocks are strong enough to make them well worth buying today. That’s because they are likely to crush the 2% to 8% CAGR total returns most analysts expect from the S&P 500 over the coming years.

Valuation: Now’s A Great Time To Buy All These Brookfield Stocks



(Source: YCharts)

BIP and BPY/BPR haven’t had a great year, while BAM has come storming back from its December lows to substantially outperform the market. However, the good news is that all three stocks are good to great buys today.

For BIP and BPR/BPY, I use dividend yield theory since this is a highly proven valuation method for stocks that are primarily owned for income. Since 1966, asset manager/newsletter publisher Investment Quality Trends has been exclusively using this approach to deliver decades of market-beating returns (and the best risk-adjusted total returns of any newsletter in the country over the past 30 years).



(Source: Investment Quality Trends)

DYT just compares a stock’s yield to its historical norm, because assuming the business model is stable, yields tend to revert back to their historical norms. Thus, long-term average yields approximate fair value.

StockYield5-Year Average YieldDiscount To Fair ValueUpside To Fair Value

Valuation-Adjusted Total Return Potential

Brookfield Infrastructure4.9%4.6%7%7%10.6% to 14.6%
Brookfield Property6.8%5.0%26%36%14.9% to 17.9%

(Sources: management guidance, dividend yield theory, Moneychimp)

Today, DYT estimates that BIP is trading at a slight discount to fair value while BPR/BPY is trading at a very high margin of safety. That’s not surprising given that 33% discount to NAV.

For BAM, we can use management’s estimated intrinsic value but also look at its P/FFO.

StockP/FFOHistorical P/FFODiscount To Fair ValueUpside To Fair Value

Valuation-Adjusted Total Return Potential

Brookfield Asset Management10.510.3-2%-2%19.2% to 21.5%

(Sources: earnings supplement, F.A.S.T Graphs, management guidance)

Over the past 20 years, BAM has traded at an average of 10.3 times FFO, which is basically where it trades today (DYT also says BAM is about fairly valued, but I don’t use it since it’s not owned primarily for income).



(Source: BAM earnings supplement)

However, for a blue-chip of BAM’s quality, I’m happy to recommend it at fair value, based on my personal valuation scale.



Even if the market never agrees with BAM on the intrinsic value of its business model, I consider the price close enough to fair value to make it a “buy”. BIP is also a “buy” while BPY/BPR are “very strong buys”.

Of course, that’s only for investors comfortable with their risk profiles.

Risks To Consider

Stocks are known as a “risk asset” because they are junior to everything on a company’s capital stack. This means they have the most upside if things go well, but the most downside if things go poorly. So, here’s what investors need to keep in mind with BAM, BIP and BPY/BPR.

For BAM, there are two big risks to consider. First, as an asset manager, the company’s cash flow, being derived from fee bearing assets and capital gains, makes it highly sensitive to the health of the US and global economy. With global growth now slowing and a US recession possibly coming in 2020 or 2021, that means that Brookfield’s investment returns might take a big dip in the next few years.

As a result, its torrid FFO/share growth might stall or even turn negative in the short term, which is where its high volatility comes in. Over the past 10 years, BAM has been, on average, 31% more volatile than the S&P 500. And during the Financial Crisis, it crashed 72% compared to the S&P 500’s 57% peak decline. Now, in fairness to BAM, that was due to the freezing up of the global credit markets, which is the lifeblood of its business model.



Note 0 = average financial stress since 1993

As you can see, during a normal recession, financial stress (based on the St. Louis Fed’s index) tends to rise to 1.5 to 2. The Financial crisis saw it reach about triple that amount which likely explains BAM’s swan dive during the Great Recession.

The next recession is likely to be far milder, with BAM’s paltry (and falling) payout ratio allowing its dividend to remain safe. But the point is that this high beta stock might decline 40% to 50% during the average bear market (30% average peak decline in S&P 500 since 1926). Anyone owning BAM needs to be prepared for such a crash and build it into their overall asset allocation/portfolio strategy.

As for BIP, the main risks here are executional and related to foreign currency translation.



(Source: earnings supplement)

65% of BIP’s cash flow is in US dollars, courtesy of management’s two-year hedging program. However, that still leaves a lot of currency risk, especially when it comes to the Brazilian Real. Brazil’s economy (and thus currency) is closely tied to commodity prices, which are sensitive to China’s economy because of how much raw materials the world’s second-largest economy imports.



Thanks partially to the trade war with the US (but also several secular factors) in 2018 China’s economy posted its weakest growth in 28 years. The IMF estimates China’s growth will continue to slow over time, even if a trade deal is struck soon (it now appears delayed, possibly until April).

Brexit is another possible risk to consider because BIP owns a lot of UK based assets. While that cash flow is fully hedged for two years, a hard Brexit (on March 29th) could cause the Pound to crash and remain permanently low. That’s because according to the UK Treasury, a no deal Brexit could result in a big hit to England’s economy, including 9.3% lower GDP by 2034 relative to no Brexit. Worse yet, in the short term, the Bank of England estimates a hard Brexit might result in an 8% decline in GDP, resulting in a recession worse than the Financial Crisis.

Should the worst-case scenario occur, then the Pound might be far weaker when BIP’s hedges roll off, resulting in a significant hit to cash flow growth from its UK assets in a few years.

Meanwhile, BIP’s global presence, especially in rapidly growing emerging markets, like India, exposes it to significant regulatory risks due to high levels of bureaucracy and potential corruption. In 2017, BIP had a major telecom tower deal fall apart due to regulators nixing a major telecom merger that the investment was predicated on.

These executional and currency risks are not likely to threaten the LP’s distribution but could serve as headwinds to growth resulting in payout growth coming in at the lower end of management guidance.

As for BPR/BPY, there are two risks to keep in mind. Like with BIP, the REIT/LP has high amounts of currency risk, due to operating all over the world. But the biggest risk is the large amount of floating rate debt it took on to fund the GGP acquisition. Today, BPY/BPR has 37% of its debt tied to LIBOR or about $17 billion.



(Source: earnings supplement)

That high amount of floating rate debt can result in some significant short-term volatility with CFFO/share sometimes being hit as much as 7% in a single quarter. Until management can refinance that with fixed-rate debt, BPY/BPR is going to be at higher risk of credit markets tightening during a recession.

The $30 billion in fixed-rate debt won’t be an issue, given its self-amortizing and non-recourse nature. However, Brookfield Property’s ability to execute on that $6 billion growth backlog in real estate properties is heavily dependent on access to low cost borrowing, as well as capital gains from real estate asset recycling.

This means that, while BPY/BPR is effectively self-funding, during a recession, its ability to raise enough low cost capital to achieve its growth plans could become impaired. Depending on how long such a downturn lasts, this might cause the LP/REIT to miss its cash flow growth guidance, forcing management to possibly grow the dividend/distribution slower, or even freeze it entirely.

This would likely wreak havoc on the share/unit price, which as we’ve seen in recent months, can be incredibly volatile.



(Source: YCharts)

And while such volatility works to the advantage of long-term investors thanks to management’s ability to buyback deeply undervalued shares/units at extremely accretive prices, during a recession/bear market, the REIT/LP’s decline in cash flow (from small capital gains on investment) might now allow it to take advantage of such opportunities.

Again, I need to emphasize that I don’t expect BPR/BPY to cut its payout during the next recession. I wouldn’t own it or recommend it if I thought this a large risk. However, the point is that during the next economic downturn, 5% payout growth might not be achievable, which could hurt the stock price significantly.

While that would be a great thing for value investors like me, looking to lock in 8%, 9%, or even 10% potential yields, retirees on the 4% rule (selling assets every year) need to keep such potential future price action in mind. Make sure that you have 3+ years of cash/bonds in your portfolio to cover expenses so you don’t have to be a forced seller of a Brookfield stock (or any stock for that matter), during a bear market.

Bottom Line: These 4 Stocks Are Great Ways To Cash In On The World’s Best Dividend Empire

When it comes to successful long-term investing, one of the most important things you can focus on is quality management. After all, the entire purpose of passive investing is trusting your hard-earned money to skilled capital allocators who can deliver safe and exponentially growing income (and great total returns) over time.

When it comes to hard assets, one of my favorite asset classes, no one can match Brookfield in terms of masterful opportunistic value investing. Brookfield Asset Management, Brookfield Infrastructure Partners, and Brookfield Property Partners/REIT all offer dividend growth investors differing ways to cash in on what I consider to be the greatest dividend empire in the world.

BAM is best for those looking to avoid K1s and who care more about maximizing total returns than immediate income. That’s due to being the head of Brookfield’s global empire, and benefitting from the fastest cash flow growth, via multiple income streams.

Brookfield Infrastructure Partners is a great choice for high-yield income growth investors looking for the longest growth runway and thus the best “buy and hold forever” potential. Just remember it uses a K-1 tax form and has rather complex tax implications due to its double pass-through structure.

Brookfield Property Partners is the best way to benefit from Brookfield’s real estate investing prowess, if you’re looking for tax-deferred income and don’t mind a K-1 form.

Brookfield Property REIT is economically the equivalent of BPY and lacks the tax-advantaged nature of its distributions, but uses a 1099 form that REIT investors tend to prefer.

Today, all four Brookfield stocks represent good to great investing opportunities with valuations ranging from fair value to a 26% margin of safety. All four should be able to deliver double-digit long-term total returns that should leave the market in the dust in the coming years.

In terms of maximal total return potential BAM is the clear winner, with BPY/BPR coming second, and BIP in third, thanks to its new focus on increased capital recycling and self-funding its future growth.

Disclosure: I am/we are long BIP, BAM, BPR, BPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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