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Better Buy: Brookfield Infrastructure Partners vs. Terraform Power

Matthew DiLallo, The Motley Fool

Yield-hungry investors have several excellent options to satisfy their income cravings. Two of my personal favorites are infrastructure giant Brookfield Infrastructure Partners (NYSE: BIP) and renewable-energy generator TerraForm Power (NASDAQ: TERP), which currently yield 4.8% and 5.9%, respectively.

While I have no problem holding both in my portfolio, some investors favor owning a smaller number of stocks, and might want to buy only one of these high-yielders. If that's the case, one does stand out as the better buy right now.

Oil pumps, a natural gas well, and solar panels with the sun setting in the background

Image source: Getty Images.

Comparing their financial profiles

The best place to start when analyzing potential investments is the financial profile. Here's how these two high-yield stocks compare:

Company

Credit Rating

Cash Flow Percentage Which Is Fee-Based or Regulated

Targeted Dividend Payout Ratio

Dividend Growth Forecast

Brookfield Infrastructure Partners

BBB+

95%

60% to 70% of cash flow

5% to 9% per year

TerraForm Power

Ba3/BB-

95%

80% to 85% of cash flow

5% to 8% per year

Data sources: Brookfield Infrastructure Partners and TerraForm Power.

Two metrics stand out in that table. First, Brookfield Infrastructure Partners has an investment-grade credit rating, while TerraForm Power does not. That's due in large part to some legacy issues at the renewable-power company. Brookfield is working on several initiatives to bolster its financial profile, including refinancing some existing debt at lower rates. These moves have the company on track to reach its targeted leverage ratio of 4.0 to 5.0 times cash flow by year-end. That should put the company in line for an upgrade to an investment-grade rating, which would help reduce its borrowing costs, among other things.

The other noteworthy difference between the two is their targeted dividend-payout ratio. Brookfield aims for a more conservative payout ratio, which is why it has a lower dividend yield. This approach has several benefits, including enhancing the dividend's sustainability, as well as providing Brookfield with more retained cash to help finance expansion projects.

While these differences might not seem large, Brookfield's higher credit rating and lower dividend-payout ratio do give it a stronger financial profile compared to TerraForm Power.

A quick look at valuation

Both Brookfield and TerraForm Power have enjoyed strong stock-price performance this year, with each gaining more than 20%. While they're not as cheap as they were at the start of the year, they still trade at compelling values.

Brookfield Infrastructure is in the process of reshaping its portfolio. It sold several assets in the past year, and is replacing them with more than a half-dozen new businesses it's acquiring. Once it closes the last of those deals later this year, the company expects that the go-forward portfolio will generate about $3.60 per unit of cash flow on an annualized basis. With units of the infrastructure company currently selling for around $42 apiece, Brookfield trades at about 11.7 times cash flow. That's a good value for such a strong company, especially given that Brookfield expects to grow its cash flow at 6% to 9% annually over the next several years.

TerraForm Power, on the other hand, expects to generate about $1.10 per share of cash flow this year. With shares currently trading at about $13.75 apiece, TerraForm sells for around 12.5 times cash flow. While that's a reasonable valuation, it shouldn't trade at a premium price to Brookfield, since TerraForm only expects to increase its cash flow by about 14% through the end of 2022.

Verdict: Brookfield Infrastructure Partners is a better buy

While TerraForm Power might offer investors a higher dividend yield, that's not enough to give it the edge over Brookfield Infrastructure Partners. That's because Brookfield has a stronger financial profile, which increases the long-term sustainability of its payout. Furthermore, it trades at a cheaper valuation even though it's on track to generate strong growth. Those two factors should enable Brookfield to produce stronger total returns over the next few years, making it the better buy between the two.

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Matthew DiLallo owns shares of Brookfield Infrastructure Partners and TerraForm Power. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.