Infrastructure investment trusts tick more than enough boxes if you’re after dividends. Yields tend to be pretty high, payouts can have inflation linkage or at least a progressive element, and the assets generating the revenue should be fairly immune to whatever’s happening in the wider economy.
But it’s also worth considering how well backed such dividend payments are over the longer run – and the implications that might follow on from that analysis.
Analyst Joe Pepper at Liberum offers an interesting perspective. He observes that dividend cover has mostly improved across the sector lately thanks to inflation-linked contracts and high power prices giving many portfolios something of a cash injection. While he views this as positive in the medium term, the Liberum team suspects “significant variation” when it comes to the long-term sustainability of dividends across the sector. The key concerns are that subsidy income will dwindle over the next 15 years or so, while the finite lives of certain assets will force some trusts to reinvest cash – reducing the amount that can be used to stand behind a dividend.
It’s interesting to see some of the potential dividing lines that emerge. The team worries, for example, that the “super-core” public-private partnership assets favoured by BBGI Global Infrastructure (BBGI) have a finite lifespan. They see this as especially worrying for BBGI given such assets make up the whole portfolio, although it’s worth remembering that fellow sector stalwarts HICL Infrastructure (HICL) and International Public Partnerships (INPP) are also exposed, if to a lesser extent.
The outlook seems sunnier when it comes to other subsectors, although there are certainly a few complications. Liberum highlights 3i Infrastructure (3IN), Pantheon Infrastructure (PINT) and the two digital infrastructure trusts as portfolios containing assets that have an indefinite life. That's positive, but the fact that such assets have ongoing capital expenditure requirements can translate into yields below the sector average. The renewable energy infrastructure trusts, meanwhile, often have significant inflation-linked subsidy income, feeding into a rising dividend, but back assets that require some reinvestment of cash. When it comes to infrastructure debt vehicles, the main concern is that the assets have minimal inflation linkage, making it hard for the nominal dividend to grow over the long term. The picture is muddier when it comes to the various trusts that hold a combination of different assets.
Winners and losers could emerge across subsectors based on a few different factors. Liberum’s team points to Sequoia Economic Infrastructure Income (SEQI), SDCL Energy Efficiency Income (SEIT) and, to a lesser extent, JLEN Environmental Assets Group (JLEN) as potential winners on an income basis thanks to their high yield and high dividend sustainability (as indicated by a low requirement for reinvestment).
This is all theoretical and relies on myriad assumptions, including that dividends increase with an assumed inflation rate, subsidy income expires in 2035 on average, and cash is reinvested each year in a way that maintains a portfolio’s current asset mix. The time horizon set out also gives plenty of scope for a change in tack. But it’s a useful reminder that even such a reliable asset class faces hurdles in future.
