Over the past couple of decades, Warren Buffett (Trades, Portfolio) has been taking a bit of a different direction with his investments in Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). The corporation has been deploying tens of billions of dollars into infrastructure assets, which are not the sort of acquisitions the Oracle of Omaha would have been buying at the start of his career.
Infrastructure assets tend to have long lifetimes but relatively poor returns. Compared to asset-light companies like Apple (AAPL, Financial), which can earn relatively high returns on investment, infrastructure requires a lot of upfront capital and has significant regulatory constraints.
Lower returns
The challenges associated with infrastructure investing can reduce returns available from the industry. That said, infrastructure assets do have long lives, and this could be part of the trade-off Buffett and his portfolio managers have been making.
It seems that Berkshire has been trading some of its high returns for long-term guaranteed returns in an industry where they can deploy vast amounts of capital. It would be challenging for Berkshire to deploy the same amount of money into smaller growth companies that achieve higher rates of return.
Buffett has said in the past that investing in infrastructure is not a way to get rich, but it is a way to stay rich. Some investors may prefer the slow and steady returns available from infrastructure assets compared to the high but relatively volatile returns one can achieve from investing in other types of businesses, especially given the sheer amount of capital Berkshire has to deploy.
Defensive income and growth
Kinder Morgan Inc. (KMI, Financial) is one company in the energy infrastructure space that has more financial firepower than most. The group operates through four segments: natural gas pipelines, natural gas liquids, LNG and other hydrocarbon storage and transportation.
These facilities are critical to the energy independence of the United States, and as energy prices rise, their role in the global economy is only going to become more vital.
What I really like about this company is the fact that it is boringly predictable. Earnings across the business increased just 1% year-over-year for the fourth quarter of 2021. Higher growth rates in its pipelines division offset a decline in its terminal business due to lower rates for charter ships.
Alongside its full-year results, the company stated that it would generate $7.2 billion of adjusted Ebitda and $4.7 billion of free cash flow in 2022, representing growth rates of 5% and 9%, respectively.
This cash flow generation will cover its dividend yield and expansion program. The company plans to invest $1.3 billion in new projects in 2022. This capital spending will be covered by free cash flow.
In fact, the company is generating so much capital is will have $870 million of cash flow to spare in 2022 based on current projections. Management has stated that the company could deploy $750 million of this to repurchase shares, although considering the current energy crisis, I think we could see a change in the direction later in the year. This money could be spent expanding the company's facilities to increase export capacity and move more LNG around the world.
At the core of this investment thesis is stability. At the time of writing, the stock offers a dividend yield of around 6.2%. That looks incredibly attractive in the current interest rate environment. On top of this income, there is also growth potential as the group expands its capital and infrastructure base over the next year. This is without giving any account to future growth potential from higher demand for natural gas around the world and higher hydrocarbon prices.
Put simply, Kinder Morgan could be one way for risk-averse investors to build exposure to the global energy crisis while picking up a 6%+ dividend yield. The company's stability and predictability make it one of the best ways to play what can be a highly volatile sector, in my opinion.
