Brookfield Infrastructure Vs. Energy Transfer: Only One Is A Strong Buy

Summary

• A major market rotation is ongoing from tech to defensive businesses.
• I compare two leading blue-chip defensive high-yield dividend growth stocks in ET and BIP.
• I share my thoughts on which is the better buy today.

JamesBrey

A major market rotation is going on right now with investors shifting capital from overvalued tech, crypto, and other names that have been booming in recent years to defensive businesses that should hold up well during a recession and benefit from interest rate cuts. We have been positioning our portfolio over the past year in anticipation of this market reversal and - while we were probably a bit early - today we are reaping the benefits of it while still having outperformed the market in recent years despite having very little exposure to the AI boom.

To help investors with this market rotation, today I will compare two prominent high-yield stocks with defensive business models and strong investment-grade balance sheets and share my thoughts on which one is the better buy today to profit from this market reversal: Energy Transfer (ET) or Brookfield Infrastructure Partners (NYSE:BIP)(NYSE:BIPC).

Business Models

Both businesses are infrastructure businesses that benefit from heavily contracted assets with lengthy contract profiles and stable cash flows. ET is concentrated in the midstream sector, whereas BIP is diversified across multiple sectors, including midstream, utilities, transportation, and data. This means that ET is a more concentrated bet on the energy market, whereas BIP is more diversified across multiple sectors and therefore also has more opportunities for capital recycling and growth investments.

This is reflected in their business models, where ET mostly takes a buy-and-hold approach to allocating capital, whereas BIP is constantly selling assets and reinvesting the proceeds in order to accelerate the compounding process for investors. BIP is also able to leverage its relationship with its external manager, Brookfield (BAM)(BN), to generate significant deal flow for both selling assets and buying new ones across multiple sectors. This has been reflected in its recent deals to acquire a major transportation or global shipping business in Triton International, as well as numerous data center investments and a semiconductor manufacturing plant in partnership with Intel. Both of these position it to profit from the ongoing AI boom. That being said, both business models are very defensive and also have built-in inflation protections, making them good choices for recessionary and especially stagflationary environments.

Balance Sheets

When it comes to their balance sheets, both have solid investment-grade credit ratings, with ET having a BBB credit rating from S&P and BIP having a BBB+ credit rating from S&P. While ET’s leverage ratio is significantly lower than BIP’s, both have significant liquidity, and BIP has the distinct advantage of having the vast majority of its debt at the asset level (which reduces corporate-level risk from any single asset), whereas ET’s debt is primarily concentrated at the corporate level. Additionally, BIP has very few debt maturities in the near term and thus has very little exposure to refinancing risk, whereas ET has more debt maturities in the near term. However, ET generates significant free cash flow that could enable it to repay its debt as it matures, if it chooses to do so. As a result, neither business is at any meaningful risk of financial distress for the foreseeable future, so investors can sleep well at night through a recessionary period knowing that their balance sheets should be in good shape.

Growth And Distribution Outlooks

When it comes to growth potential, both businesses take an aggressive approach to investing in growth. ET has a proven track record of making accretive acquisitions, including the Lotus Midstream and Crestwood acquisitions in 2023, and recently announcing its acquisition of WTG in May 2024. The company is also pursuing a significant organic growth project pipeline as ET expects to pay a little over half of its distributable cash flow to unit holders via distributions while investing about 40% of its distributable cash flow into growth projects, with the remainder being used on a discretionary basis for debt reduction and unit repurchases depending on market conditions and the company’s current leverage profile. Overall, ET expects to continue growing at a low to mid-single-digit annualized rate, with a distribution growth rate that reflects this, targeting an annualized growth rate of 3 to 5%.

Meanwhile, BIP expects to grow its distribution at a 5 to 9% annualized rate and its FFO per unit at a 10%+ rate over the long term, while maintaining a 60 to 70% payout ratio target. BIP expects its data segment, which is currently its smallest and only 10% of its FFO contribution, to be the main growth driver moving forward, as it has recently been investing aggressively in data center businesses that it expects to generate very rapid growth. Therefore, the data business should become an increasingly large portion of its overall business, while its utilities, transportation, and midstream businesses provide stable cash flow to fund its growth pipeline and distributions.

BIP expects to generate impressive growth each year through a combination of inflation indexation on its assets, contributing 3 to 4% per year in annualized growth, 1 to 2% per year in GDP growth which drives natural demand growth for its services, and 2 to 3% growth from reinvested cash flow, delivering 6% to 9% organic growth per year. The remaining growth of between 1% and 4% or even greater each year, will come from mergers and acquisitions through its opportunistic capital recycling program, with each new investment targeting an after-tax levered IRR of 12% to 15%.

When it comes to the distribution, both businesses have conservative coverage ratios. ET’s distribution is covered nearly two times by distributable cash flow, and BIP’s is expected to be covered at 1.5 times by adjusted funds from operation and nearly two times by funds from operation this year. Moving forward, analysts expect BIP’s distribution to grow at a 6.7% CAGR through 2028, while they expect ET’s to grow at a 5% CAGR over the same time span.

Investor Takeaway

On a valuation basis, ET has an 8.4% current yield, while BIP has a 5.5% next 12-month distribution yield. Given that BIP is expected to grow its AFFO per unit at a 13.3% CAGR through 2028, compared to ET’s expected 5.8% distributable cash flow per unit CAGR, the yield-plus-growth profile for BIP is vastly superior to ET’s. Additionally, BIP’s business model is better diversified, its credit rating is higher, its near-term debt maturities are lower, and its average contract length and regulated profile provide a more stable cash flow profile than ET’s. Moreover, BIP is not as susceptible to the energy sector, whereas ET is highly leveraged to the energy sector. In the event that a recession takes hold, ET may suffer greater market sentiment concern than BIP will, since BIP invests in utilities, long-term leased shipping containers, toll roads, and well-contracted data centers in the AI space that have very strong secular tailwinds driving growth, even through a recession. As a result, while I like both right now, I greatly prefer BIP and rate it a Strong Buy right now.