Still number one buy list stock on the Canadian market for December is Brookfield Corporation (BN.TO / BN). The engine behind the Brookfield family of businesses, BN is a core holding, one that investors can hold for a long time. Have a look.
You can have a look at my buy list stock pick of the month on the U.S. market.
BN.TO Business Model
Brookfield Corporation is an alternative asset manager, meaning that its assets are not liquid like conventional assets such as stocks, bonds, cash, ETFs. It owns and operates these real assets with a focus on compounding capital over the long term to earn attractive total returns for its shareholders. Managing alternative assets requires a high level of expertise and patience.
BN is the parent company of the other Brookfield companies; through them BN focuses on long-life, high-quality assets including: Renewable Power & Transition assets in hydro, wind, solar, distributed energy and sustainable solutions; Infrastructure assets in transport, data, utilities and midstream sector; Asset Management, managing funds coming from pension plans and other investors; Private Equity, businesses that provide essential industrial, infrastructure, and business services; Real Estate with a diversified portfolio across many industries and spread across five continents; Credit, through its majority interest in Oaktree; and Insurance Solutions across the life, annuity, and property and casualty industries.
Investment Thesis for Brookfield Corporation
The company has access to billions of dollars in liquidity to finance its projects and has built impressive expertise in various industries. BN is present in countries that show potential for high growth for years to come. Its diversified businesses are a solid source of permanent capital. Over the last few years, BN has seen an increase in both the number and size of average client commitments. BN is well-positioned to expand its private fund investor base in Europe and parts of Asia.
Brookfield Corporation doesn’t only do the asset-light manager’s job consisting of strategy and earning fees on assets under management (AUM); it also contributes with its own assets. Therefore, it benefits from its own strategies to recycle its assets; in other words, it can sell assets it considers to be at a high value and reallocate the proceeds into new projects or undervalued assets. It’s the classic “buy low, sell high” concept.
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BN.TO Last Quarter and Recent Activities
Brookfield Corporation reported decent results for its most recent quarter with revenue increasing 5%, but distributable earnings per share remained flat. Insurance solutions distributable earnings were up 14% as insurance assets increased to ~$50B. The average investment portfolio yield was 5.5%, about 200 basis points higher than the average cost of capital. It continues to track towards reaching $800M of annualized earnings by the end of 2023.
Operating businesses earnings declined by 8% but funds from operations were supported by a stronger performance from the renewables and infrastructure segments. The asset management segment was up 13% and BN ended the quarter with $120B to invest.
The bigger news about Brookfield of late was its offer to BN shareholders to exchange their shares for shares of Brookfield Reinsurance (BNRE), one for one. There was no share dilution, and the company did it to improve equity base and market capitalization of BNRE.
Potential Risks for BN.TO
BN’s growth depends on investors’ confidence in long-term projects. When panic arises, it becomes difficult for companies like BN to increase their AUM. We had another example of this phenomenon in 2022, when the stock price dropped along with the market.
BN is well-managed and has the ability to navigate the current crisis. Investors must simply remain patient. Its operational complexity can leave many investors wondering how money is managed within the business; it’s easy to get lost in the pile of financial statements throughout the multiple companies and the many stock classes.
Contrary to BAM, which is asset-light, BN’s success relies on management’s ability to manage its assets; in short, making money selling at the right time, and reallocating capital into the right assets at the right time. This adds to the complexity of its business model and requires a larger cash reserve.
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BN.TO Dividend Growth Perspective
Following the spin-off of BAM, it’s clear that BN is a low-yield, high-growth stock. The company kept a low yield by paying a $0.07/share dividend. We expect this dividend to increase each year. However, if you’re looking for a more generous yield, BAM is the better option.
BN has the advantage of owning a stake in various assets across the Brookfield family, while BAM has the advantage of simply managing the money and earning revenue on a fee charged on the assets under management.
Final Thoughts on Brookfield Corporation
It’s virtually impossible to buy a piece of a bridge or a railroad. This is where Brookfield comes into play as investing in Brookfield Corp is like investing in your own “alternative asset fund”.
As an asset manager, you can expect BN.TO to go through some difficult times with the higher interest rates and possible recession. However, its depth of assets, expertise, and geographic distribution make it a worthwhile buy list stock for investors seeking long-term dividend growth.
Investing in alternative assets is a great way to diversify a portfolio. Usually, the investment returns on such investments are decided by what’s happening on the stock market. You can expect them to generate about 5-7% above inflation over long periods of time. Interest in alternative assets is increasing, especially for institutional investors.
See also the list of Canadian Dividend Aristocrats for other great stock pick ideas.
What’s not to like? DEBT! Telecoms rack-up debt faster than teenagers eat burgers! Right now, the narrative doesn’t fit with the numbers. For 10 years, Telus had a clear plan: get as much cheap debt as possible for investments (CAPEX) to fuel stronger generation of cash flows from operations. Ten years later, it’s time to show that stronger cash flow and smaller CAPEX. It’s improving, but not fast enough. I want to see Telus’s free cash flow cover the dividend payment. Management seems confident though; it raised the dividend again in November.
There isn’t much to dislike about TD. I rank it third behind Royal Bank and National Bank only because of its larger exposure to the loan market. A more classic bank, TD takes fewer risks in the stock market, but more for mortgages and commercial loans. With high interest rates and possibly a slowing economy, all eyes on its provisions for credit losses. While a great source of growth, TD’s presence in the U.S. can expose it to a more volatile economic environment. When it comes to banks, it’s the wild west in the U.S.
Fortis invested aggressively over the past few years resulting in strong growth from its core business. You can expect revenues to keep growing as expansion continues. I like its goal of increasing its exposure to renewable energy from 2% of its assets in 2019 to 7% in 2035. In its five-year capital investment plan of ~$20B up to 2026, only 33% is financed through debt, while 61% comes from cash from their own operations.
What’s not to like? Legal battles and debt! Building, maintaining, and replacing pipelines has become a toxic topic. Politicians and regulators are cautious about projects related to oil & gas transportation; they have environmental impacts and are increasingly unpopular with the public. So, more legal battles and fees, and increased likelihood that projects go sideways. This explains why Enbridge offers such a generous yield.
However, it could become another AT&T (T). T pleased investors for years until things fell apart and ended up another high yielder nightmare for investors. With high interest rates, BCE’s debt burden could hinder its ability to increase dividends. Always monitor the dividend growth and start worrying if the trend slows down. Finally, if 5G doesn’t generate the expected cash flow, I wonder where BCE will find its growth.
Over the years, TD has increased its retail focus, driven by lower-risk businesses with stable, consistent earnings. The bank enjoys the largest or second largest market share for most key products in the Canadian retail segment. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has sizeable exposure in major cities like Toronto, Vancouver, Edmonton, and Calgary, combined with a strong presence in the US.
Look for investors’ presentations and quarterly earnings reports on the company website. Doing that reveals that another renewable, Brookfield Renewable (BEPC/BEPC.TO), hosted its investors day in September. Contrary to NEP, BEPC reaffirmed its growth expectations and distribution growth targets…business as usual for BEPC.
First, ignore the noise, or you’ll get lost in a myriad of conflicting information. Here are three articles on Seeking Alpha for October 6 (Strong Buy, Sell, and Hold ratings).