by Travis Johnson, Stock Gumshoe | April 4, 2012 11:47 am
I don’t often cover the same editor or pundit twice in a row, but it’s not exactly a hard rule … which is a relief, because the most interesting thing I came across this morning was another teaser from Dan Ferris.
Now, it’s not the same hard sell as his 12% Letter pitch that we wrote about yesterday — this was apparently a teaser spiel that was sent out to Stansberry subscribers in some other way, because I’ve only gotten excerpts from a few folks to give me a tantalizing hint about a stock he’ll be picking (yes, that’s the other inducement, it apparently teases a stock that he will be picking for his letter on Friday, not one that he has already released to subscribers).
So I haven’t seen the original letter, which means you have to take this with a bit of a grain of salt — I don’t know the context and I can’t promise that Ferris really sent it out, but it seems real to me and here’s the excerpt of clues that I got:
“In this month’s issue of Extreme Value, due out Friday after market close, I (Dan Ferris) have a new recommendation for readers – a dividend-paying company that has totally revamped its business. It just raised its dividend for the first time since 2008, confirming our belief that the business is more valuable than ever and management (which owns 19% of the stock) is unlocking immense value for shareholders.
“In fact, the company spun off part of one of its businesses to its shareholders in early 2008. The spinoff’s stock is up 80% since then. And guess what? It’s spinning off a piece of another business this year. I expect that spinoff will again create tremendous value in the next couple years for shareholders who get in today.
“This company’s business is based on real assets with long-term revenue streams that gush large amounts of stable cash flows. Management has proven it’s made up of consummate, disciplined value investors. They buy high-quality assets when they’re distressed and hold them for the long term. They’re known for doing the right thing at the right time. They aggressively bought back their stock in the depths of the financial crisis, when it was dirt-cheap. That’s a feat of financial genius.
“Most companies stopped buying back their shares when the market tanked in 2008-2009. Even Wal-Mart stopped buying back shares for a while. But this company saw an opportunity and seized it, creating huge value for shareholders. To discover this safe, cheap opportunity, you’ll need access to Extreme Value. Click here to learn more about subscribing.”
Extreme Value ain’t exactly a market-timing or small-cap newsletter, so it’s not like this recommendation will be shooting up on Friday when he formally releases it to his subscribers — just want to get that caveat out of the way.
And who is this dividend-raising, real asset company? Well, we take all that info, toss it into the ol’ Thinkolator, and get a high degree of certitudinousness (though we can’t quite hit 100% with those clues) that Ferris is about to recommend: Brookfield Asset Management (BAM)
Brookfield, which was still known as Brascan until a few years ago, is an asset management company that focuses on hard assets — helping investors to get exposure to hydropower, or utility assets, or timber, or real estate. They own pieces of a huge number of different kinds of assets around the world, after starting life as a Brazilian utility investor over 100 years ago (“Brascan” came from Brasil+Canada), and the company has been a value investor favorite off and on for the past decade or more in part because of their “hidden” infrastructure assets and the masterful management of Bruce Flatt (who has been teased from time to time as the “next Buffett” for his recent skill in running Brookfield and managing its wide variety of assets… not as aggressively as fellow Canadian Prem Watsa over at Fairfax Financial, to be sure, but occasionally).
So why is this a match?
Well, Brookfield did just increase their dividend for 2012, and it was the first increase since 2008.
And they did have an extremely successful spinoff of a division, which became Brookfield Infrastructure Partners (BIP), in early 2008 … and that spun-off company has been up in the neighborhood of 80% since then depending on what day you use for your calculations (I like BIP a lot and regret never having bought the shares because it never got quite cheap enough to grab my attention, we’ve mentioned it a few times in this space).
And they are expected to spin off more of their real estate business this year, in their push to be more of a manager than an owner of assets (and enjoy the risk reduction and the high-margin fees that the management business brings). If all else continues to work well, that spinoff might indeed be a boon to the parent, Brookfield owns a huge amount of real estate around the world (including Zuccotti Park, home of the Wall Street Occupiers) that might garner quite a bit of attention in a separate entity, and they have generally found that their “flagship” publicly traded investments (so far, the prominent ones have been BIP and their new hydropower spinoff last year, Brookfield Renewable Energy Partners — BEP in Toronton, BRPFF on the pink sheets) have served to revalue those assets higher in investors’ minds, particularly by paying large dividends in the MLP structure.
As you might expect, the parent gets some nice fees for managing these partnerships and funds that they spin off, including, in the case of BIP at least, a continuing large ownership slice and managing partner status that gives them the potential for incentive distributions. Brookfield already has almost a dozen publicly-traded affiliates or subsidiaries that serve as targeted asset investment options for investors (not including a bunch of closed-end funds that they sell in the US, Canada and elsewhere). The “announcement” about possibly spinning off more of their owned real estate assets into another publicly traded “flagship” investment partnership came in their last letter to shareholders and it’s not a promise for 2012 — here’s how they put it:
“The next step, expected in 2012, if we can achieve it, would be the launch of a similar flagship public entity for our property group, which is currently one of the largest diversified real estate businesses in the world. If launched, this entity would likely be created through the partial spin-off of shares of our currently 100% owned property group to our shareholders, as we did with Brookfield Infrastructure in 2008. Like our other two flagship entities, this entity would have a mandate to expand globally, be managed by us and have a strong dividend payout policy. As with the others, we would retain a very meaningful investment in this business.”
And yes, management and directors own about 19% of the company.
Reading that annual letter to shareholders is a good first step if you want to understand Brookfield. It is a large beast with a very complicated structure thanks to all of their publicly traded and private investment subsidiaries, but if you focus on the measures they use to judge their progress — basically, the increase in the value of the company through both earnings (from fees and realized gains on asset sales) and increase in asset value — then they certainly are a great long-term performing company. They are aiming to compound the value of the company at at least 12% per year, which from the numbers they provide appears to be lowballing it a bit, and they continue to have a “growth” bent as they buy into and out of valuable assets and develop real assets to generate returns.
Do not expect the dividend to become meaningful anytime soon — if you want current income from the kinds of assets Brookfield controls, their closed-end investment funds or their publicly traded income-focused partnerships are probably a better bet than is the parent asset manager, but they have announced a desire to “restart” their focus on increasing the dividend in line with the performance of the company over time (it’s just that when you start with a 1.7% yield, it takes a long time for that to grow and compound into something substantial, and the company has clearly noted that they don’t feel the need to pay an outsize dividend).
And there are risks, of course — beyond even just the risk of not understanding their books very well because of their large size and complex structure, and they do have (or have in the past, at least) substantial insurance assets and derivatives exposure and a private equity investment management business beyond just the hard assets stuff, though I would be surprised if they were terribly aggressive. The largest risk for Brookfield, I would assume, is probably interest rates — because of their focus on long-lived real assets they’re comfortable carrying a lot of debt, so if rates on that debt were to spike up over time their performance might suffer (all else being equal) — they certainly took a harder hit than the overall market in the 2008/2009 crisis, when they dipped down to $12 or so, but it was not as shocking as many highly leveraged firms (to give it the broad brush: they fell by about 65% at the trough versus the S&P’s 50%-ish fall, and they bounced back to recover that dip by last year — over the past five years they’re now just about in line with the S&P, but they rose a couple thousand percent from 2000-2008 so over the longer term BAM has clobbered the index).
So what do you think? Want to jump in to Brookfield before the Extreme Value folks do? (assuming, of course, that the Thinkolator is on target this time, and that the clue-y spiel I was sent was real). This is a stock that I don’t think I’ve ever owned, in part because of debt levels that are usually high and in part because when I first learned about it six or eight years ago it never seemed to take a breather and get “cheap” … but on most valuation metrics it looks pretty cheap now, partly because the increase in asset values gets more “credit” in their accounting now than it did a decade ago (because of accounting changes, not because they’re doing something wrong), and partly because their fee income and “real” earnings have grown enough to give them a discounted-looking PE ratio of around 10.
The shares trade at a relatively small premium to book value, about 1.2X book — which is just about the same ratio you’d pay for big value-favorite insurance conglomerates like Berkshire Hathaway or Markel, for example (both of which I own). That generally works out as a discount to the price/book valuations of many infrastructure and real estate partnerships, which tend to trade at higher premiums to book value, and a premium to many of the more traditional asset managers and investment bankers, who often (there’s wide variation) trade at book or at a discount to book value (particularly in times like these, when folks are skeptical of financial stocks). Brookfield is a pretty unique company, so it’s hard to say how they “should” be valued versus partial peers, but if you’re worried about inflation then an asset manager with an international “real stuff” focus on infrastructure, real estate, energy, timber and the like is probably something that belongs on your “to research” list.
The question for their future probably is whether or not they can resume a solid level of growth in assets under management and continue to make good decisions in managing their hard assets, funds, subsidiaries and partnerships, which in turn probably depends on the continuing growth in the global desire to invest in infrastructure and “real” assets — and if they can keep compounding their per-share value at 12-15% per year as they intend, and paying a slowly growing dividend, well, you could probably do a lot worse. Let us know with a comment below if you think Brookfield is your kind of company, or if you see something you don’t like in the shares.
Disclosure: As noted above, I own shares of Markel and Berkshire Hathaway. I do not own any of the other stocks covered, and will not trade in any of them for at least three days. Irregulars can see the stocks currently in my personal portfolio here.
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