America’s $2.6 Trillion Infrastructure Upgrade

Two weeks ago, in the last edition of Wide Moat Daily that I authored, I explained why small modular reactors (“SMRs”) are a potential game changer for the entire energy industry and beyond. I also included which companies I thought were best and why.

Since then, many are up 20% or more…

The new administration signed several executive orders to help the sector, including speeding up the deployment of advanced nuclear reactors.

Here’s a snapshot of one of those executive orders, “Reinvigorating the Nuclear Industrial Base”:

It is the policy of the United States to expedite and promote to the fullest possible extent the production and operation of nuclear energy to provide affordable, reliable, safe, and secure energy to the American people, to power advanced nuclear reactor technologies[.]

This, coupled with good earnings results, drove the stocks higher.

The new executive orders are a game changer for both SMR companies and those that are involved in artificial intelligence (“AI”). ChatGPT uses more than 1 billion kilowatt-hours of electricity per year. Global AI energy consumption is estimated at 260 terawatt-hours annually, or enough to power 24 million U.S. homes.

That’s roughly equivalent to the energy consumed by Australia and many other industrialized nations. Where’s it all going to come from? And how is it going to be economically and environmentally friendly?

A $2.6 Trillion Upgrade

While the advanced nuclear technology I spoke about a couple weeks ago is critical to answering those questions, it’s only part of the solution. There is a much larger trend that sovereign wealth funds, elite college endowments, and the ultrawealthy have been investing in for decades.

It has been growing faster than private equity, private debt, real estate, or natural resources. But odds are you don’t have any in your portfolio.

Today, I’m going to expand on our recent research on advanced nuclear technology and talk about infrastructure investing. Once you see the numbers, you’ll understand why sophisticated investors can’t get enough. And just like in the May 16 issue, I’ll share a few of my top picks.

The surge in infrastructure investing has several drivers you need to know. First, around 4.5 billion people live in cities today, and that’s expected to be 7 billion in 2050. That’s only 25 years away, and the amount of investment needed in transportation, water systems, and energy over that period is many trillions of dollars. That’s the story in most developing areas like India, Southeast Asia, and Africa.

On the other hand, the U.S., Europe, and highly developed countries like Japan built their infrastructure in the mid-20th century. That includes roads, bridges, and power grids. And all of them have failed to maintain those systems properly.

As of 2021, there was an estimated $2.6 trillion gap in infrastructure funding in the U.S. alone (per the American Society of Civil Engineers). If this doesn’t get resolved, there will be major problems with lights going out, bridges cracking, and so on.

That’s already a Herculean challenge, but there’s more.

Many nations – from Germany to China – are aggressively integrating renewable energy into their power systems. These require more upfront investment than traditional coal or natural gas power, with the benefit of lower expected input costs over time (no coal or natural gas to buy). That means greater initial investment for the same power generated.

Second, these sources (outside of hydroelectric) are intermittent and require extensive upgrades to transmission lines and other parts of the system. Entire backup systems costing billions of dollars are needed to stabilize the grid. Not only do these nations have to repair their aging grids, but they must also make costly upgrades.

That’s not to mention the data centers, fiber networks, subsea cables, and other investments needed to support cloud computing, AI, and 5G internet.

Though there are many types of infrastructure to invest in, the experience for investors is similar. High-quality infrastructure investments usually pay an attractive and durable yield. The users of large infrastructure projects are often utility companies, governments, or mega-corporations.

All of these customers tend to have excellent credit profiles, so defaults are exceedingly rare. In addition, whether the infrastructure helps transmit energy or build suitable roads for vehicles, there is an inflation factor. That means that investors’ income tends to rise with inflation. This is one reason why well-designed infrastructure projects are an excellent long-term income play.

Some of My Favorite Infrastructure Companies

Let’s look at a few ways a regular investor can participate. There are exchange-traded funds (“ETFs”) like the iShares Global Infrastructure Fund (IGF). It buys shares of companies that build and own infrastructure like Duke Energy (DUK), Enbridge (ENB), and Auckland International Airport (AIA.NZ). IGF is utility heavy, so its current dividend yield is only 2.8%. Its average 5-year annual return is 13%, however, so it has done well. But it’s not my favorite pick. I’d rather own companies directly. That gives me more control over the risk and reward of the investment.

Brookfield is among the largest infrastructure investors in the world. But unlike most of its peers that only permit billion-dollar investors into their funds, Brookfield gives access to regular investors via publicly traded companies.

Brookfield Renewable Partners (BEP) focuses on renewable investments across the globe. It allows you to concentrate on renewables if that’s your objective. You also get one of the best managers in the world and a diversified portfolio with exposure to multiple continents.

Brookfield Infrastructure Partners (BIP) is one of the world’s largest owners and operators of all types of infrastructure. It also has a heavy tilt toward energy production and infrastructure at 45% of the portfolio. It also has meaningful exposure to transport (22%), data infrastructure (19%), and pipelines (7%). Once again, it has excellent diversification, which helps mitigate risks.

Here’s where it becomes clear why I like many of Brookfield’s investments: BIP and BEP also both have dividend yields around 5%. That’s more than 50% greater income than the top infrastructure ETFs provide.

In a recent issue of High-Yield Advisor, a service I manage that scours every inch of the markets for the best high-yield investment opportunities, we invested in two Brookfield bonds backed by billions of infrastructure projects.

Not only are they less risky than BIP or BEP, but they yield significantly more. That’s the combination I look for to increase subscribers’ income as much as possible with minimal risk. As always, subscribers can learn more here.

Regards,

Stephen Hester
Analyst, Wide Moat Research