While there’s currently a lot of uncertainty about the near-term direction of the global economy, the long-term outlook is crystal clear. The economy is on track to keep expanding in the decades ahead, driven by population growth and the continued rise of the middle class. That means it will need a lot more infrastructure to support its growth.
According to an estimate by Swiss Re, governments worldwide will need to invest a staggering $80 trillion through 2040 on infrastructure to support continued economic growth. They can’t fund that burden alone, which will likely lead them to continue seeking out private investments. That plays right into the strategy of Brookfield Infrastructure (BIPC -1.98%) (BIP -3.11%), a leading global infrastructure investor.
Filling in the funding gap
Governments and utilities have historically made the most investment in infrastructure. However, governments around the world are facing significant deficits and burgeoning debt, limiting their ability to invest in infrastructure. That’s leading them to turn to private investors to help them fund global infrastructure investment.
Brookfield has several ways to capitalize on this opportunity, including:
- Acquire operating infrastructure businesses from governments. These transactions provide governments with capital to invest in new infrastructure.
- Bid on concessions to build and operate infrastructure. These deals allow governments to transfer capital requirements to third-party investors.
- Participate in government-supported infrastructure investments. These investments enable governments to incentivize investors to build infrastructure supported by tax credits and other incentives.
The company has the financial flexibility to capitalize on opportunities as they emerge. Its parent company, Brookfield Asset Management (BAM -3.84%), has a long history of raising capital from institutional investors for infrastructure investments.
Its latest infrastructure investment fund raised about $25 billion from investors. Brookfield Infrastructure often co-invests with these funds, enabling it to capitalize on larger-scale opportunities.
Meanwhile, the company has plenty of internal financial flexibility, thanks to a top-tier balance sheet, retained earnings, and an active capital recycling program of selling mature assets to invest in higher-return opportunities.
An extensive track record of working with governments
Brookfield has a long history of partnering with governments in building critical infrastructure. For example, Brookfield has won contracts to build electricity transmission lines in Brazil to support that country’s energy needs, including developing additional renewable energy-generating capacity. The company will often sell the finished projects to other investors and reinvest the proceeds into new developments.
The company will also acquire concessions to operate key infrastructure from governments and other investors. Brookfield has invested in several toll-road concessions in India, Chile, and Brazil. These investments have included spending money to expand several toll roads to support more traffic. It has also recycled the capital from some of these investments to fund additional infrastructure investments.
Brookfield will also take advantage of investment opportunities in projects supported by tax credits. It recently agreed to partner with chip-giant Intel (INTC -1.96%) to build two manufacturing facilities in Arizona. Brookfield is investing up to $15 billion for a 49% stake in the Intel plants.
That move will free up some of Intel’s financial flexibility so it can maintain and grow its dividend while making additional manufacturing capacity expansions. The investment came shortly after the U.S. government passed the Chips Act, providing $52 billion of incentives for the semiconductor industry. Congress is also considering passing additional legislation to create tax credits for semiconductor investors in the U.S.
A great infrastructure stock to buy for the long haul
That combination of opportunity and financial flexibility leads Brookfield to believe it can organically grow its funds from operations by 6% to 11% per share each year. Meanwhile, acquisitions could drive even faster growth. That should support 5% to 9% annual growth for its nearly 3%-yielding dividend.
Those factors position the company to potentially produce double-digit total annual returns for years to come. That makes it a lower-risk way to capitalize on the $80 trillion global infrastructure investment opportunity.
Matthew DiLallo has positions in Brookfield Asset Management, Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, and Intel and has the following options: short December 2022 $40 puts on Brookfield Asset Management and short November 2022 $55 calls on Intel. The Motley Fool has positions in and recommends Brookfield Asset Management and Intel. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV, Brookfield Infra Partners LP Units, Brookfield Infrastructure Corporation, and Brookfield Infrastructure Partners and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.
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