The $18 Trillion Tailwind For 9%-Yielding UTF And Other High Yields (NYSE:UTF)

The Cohen & Steers Infrastructure Fund (NYSE:UTF) offers investors an attractive 9% current yield that is paid monthly. However, that is not the most compelling part of its investment thesis: in this article, we will take a look at the $18 trillion tailwind for the infrastructure sector and its positive ramifications for UTF and several other high-yielding infrastructure investments that we like right now.

Infrastructure’s $18 Trillion Tailwind

Demand for new and improved infrastructure is booming right now due to the five ‘Ds’ that world-class infrastructure investor Brookfield Asset Management (BAM) has highlighted as being major tailwinds for the sector:

1. Demographics: Aging populations – especially in leading economies like the United States – demand stable investments for retirement funding. Infrastructure, with its stable cash flows and resistance to inflation, is appealing for asset managers seeking to meet these needs.

2. Development: Rapid economic growth in Southeast Asia and Latin America has created a pressing need for infrastructure, while developed countries also require extensive upgrades to infrastructure, especially given the rise of the fourth industrial revolution.

3. Digitalization: The fourth industrial revolution is fueling robust demand for digital infrastructure such as towers and data centers.

4. Deglobalization: Western countries are reshoring manufacturing and critical infrastructure to reduce dependence on China, increasing demand for infrastructure in the United States and Europe.

5. Decarbonization: Efforts to cut global carbon emissions are driving strong demand for renewable energy production.

As a result, tens of trillions of dollars are expected to be invested in the sector in the coming years. According to Global Infrastructure Outlook, global infrastructure investment needs are forecasted to reach $94 trillion by 2040, but there is an investment shortfall of $18 trillion.

However, governments are heavily indebted and – with rising interest rates – need to focus on bringing their budget deficits under control. Moreover, the leading economies of the U.S., China, Japan, and Europe are all investing increasingly aggressively in their militaries due to soaring geopolitical tensions across the globe. This means that they will be unlikely to bridge the massive gap in infrastructure and in fact, may underachieve even their current projected investment levels. Therefore, private sector funds will be crucial to meeting the immense infrastructure investment needs of the next decade and a half and also means that existing quality infrastructure assets and businesses will likely thrive in this new environment.

UTF Implications

This massive need for new infrastructure investment makes us quite bullish on existing quality infrastructure businesses and also bodes well for the long-term outlook for infrastructure funds like UTF. As the list below shows, UTF holds some very high-quality infrastructure businesses as the top 10 holdings in its portfolio:

1. American Tower (AMT) – 4.44%
2. NextEra Energy (NEE) – 3.94%
3. Southern Company (SO) – 3.59%
4. Transurban Group (OTCPK:TRAUF)- 3.10%
5. PPL Corp. (PPL) – 3.07%
6. National Grid plc (NGG) – 2.98%
7. TC Energy (TRP) – 2.90%
8. CenterPoint Energy (CNP) – 2.28%
9. Union Pacific (UNP) – 2.23%
10. Enbridge (ENB) – 2.11%

AMT – as a tower REIT – is poised to benefit from digitization. NEE, SO, PPL, NGG, and CNP are utilities that are poised to benefit from all five “Ds.” TRAUF is a toll-road company that should benefit from the demand for stable cash flows to fund retirements in aging populations and also benefit from the growing need for infrastructure development in both developed and developing economies. Finally, TRP and ENB – as energy infrastructure businesses that also deal significantly in cleaner energy technologies like natural gas, nuclear, and/or renewables – should benefit from all five of these “Ds” as well.

Here are some other reasons to like UTF right now:

1. While UTF does not trade at a discount to NAV at the moment, it does not trade at much of a premium either, giving investors access to a reasonably priced diversified portfolio of infrastructure investments with an enhanced yield due to its implementation of 30% leverage.
2. While some may be concerned (and rightly so) with UTF’s leverage, the counterargument is that UTF was able to sustain its monthly payout even through the COVID-19 lockdowns, showing that management has been able to successfully manage the fund through challenging market periods.
3. Last, but not least, UTF has significantly outperformed other infrastructure funds over the long term, including the utilities (XLU) and midstream (AMLP) sectors as shown in the chart below:

2 Other High-Yielding Infrastructure Opportunities

In addition to UTF, we are also bullish on several other infrastructure opportunities. In particular, we are bullish on Brookfield’s (BN) two main publicly traded infrastructure businesses:

1. Brookfield Infrastructure (BIP)(BIPC) owns a globally diversified portfolio of infrastructure assets including data centers, towers, midstream pipelines, utilities, railroads, ports, shipping containers, and toll roads. It has an impressive track record of growing its FFO per unit at a high single-digit CAGR over 15 years alongside paying a generous distribution to investors. It recently announced that FFO per unit increased at a very robust 17% year-over-year rate during Q4 and 9% year-over-year for the full year. It also recently declared its 15th consecutive annual distribution increase, with this one being 6%. Meanwhile, it continued to make strong progress on both new investments and capital recycling initiatives, with $550 million in capital recycling so far in 2024, putting it on track to achieve its goal of $2 billion in capital recycling for the year despite the elevated interest rate environment. Its BBB+ rated balance sheet also remains in excellent shape, with 90% fixed rate debt, an average term to maturity of seven years, only 5% of debt maturing over the next 12 months, and $2.8 billion of available liquidity.
2. Brookfield Renewable (BEP)(BEPC) owns a globally diversified portfolio of clean energy infrastructure assets including hydro, wind, solar, storage, and nuclear businesses. Like BIP, it has an impressive track record of growing its FFO per unit at a high single-digit CAGR over its 13 years of being a standalone public entity alongside paying a generous distribution to investors. It recently announced that FFO per unit increased at a strong 9% year-over-year rate during Q4 and 7% year-over-year for the full year. This is an impressive feat in an environment where new acquisitions are increasingly expensive and difficult to come by and reflects BEP’s strong embedded organic growth with inflation-linked contracted cash flows and other organic growth initiatives. It also announced its 13th consecutive annual distribution increase, with this one being 5.2%. Meanwhile, it continued to make strong progress on growth investments, with $2 billion in new investments (either deployed or agreed to) during 2023 along with having a robust development pipeline. BEP also continued to repurchase units this past year, with 2 million units being retired during 2023. The BBB+-rated balance sheet also remains in excellent shape, with over $4 billion of available liquidity. The capital recycling program also had a successful 2023 despite elevated interest rates and weak market sentiment for renewable power production assets, with asset sales generating $500 million in net proceeds.

Given Brookfield’s huge global scale and business network, BIP and BEP should continue to benefit from having access to some of the best investment opportunities in the world, Brookfield’s operational expertise, and also be able to continue recycling capital at attractive rates of return, leading to outstanding total returns over the long-term.

Investor Takeaway

Infrastructure is poised to benefit from a powerful tailwind in the coming years, as demand is projected to dramatically outstrip supply to the tune of $18 trillion based on current estimates. As a result, investing in a quality fund like UTF as well as other high-yielding opportunities like BIP and BEP can give investors access to diversified portfolios of quality infrastructure assets at reasonable to attractive valuations while also generating attractive income yields in the meantime.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.