Brookfield Asset Management – Calling All Long Term Investors

(Last Updated On: September 25, 2017)

Summary

  • Brookfield Asset Management (“BAM”) is an ideal investment for investors with a long-term investment time horizon;
  • Its astute management team has developed a reputation which enables it to raise billions of dollars for investment purposes from institutional investors;
  • BAM has exposure in geographic regions where others may not venture. Limited competition for some acquisitions enables it to negotiate attractive terms;
  • BAM approaches its investments from a long-term perspective. You should approach any investment in BAM in the same manner;
  • Investors primarily seeking dividend income may wish to consider investing in 3 of BAM’s Limited Partnerships (BEP, BIP, and BPY);
  • September 27, 2017 is Brookfield’s Investor Day. Readers may wish to check BAM’s website shortly thereafter for any information presented.

Introduction

I have previously written posts here and here on Brookfield Asset Management Inc. (NYSE: BAM) (TSX: BAM.a). I do not hide the fact I am truly impressed with BAM’s management team. In fact, my posts regarding BAM are what resulted in Larry Macdonald from The Globe and Mail writing about me in his Me and My Money column.

BAM is also one of the companies included in my FFJ Master Stock List and it is also a holding within my FFJ Portfolio; I also own BAM in other investment accounts not disclosed.

Overview

My admiration for BAM goes back several years. In 1986 I wrote a paper for my MBA program on Brascan. Brascan (the combination of “Brazil” and “Canada”) was founded in 1899 as a builder and operator of electricity and transport infrastructure in Brazil. Brascan provided electricity and tram services in São Paulo and Rio de Janeiro.

The business was renamed Brookfield Asset Management, Inc. in 2005 and it has certainly evolved considerably since that time. Today it is an alternative asset manager that operates in eight segments.

  • Asset Management: manages listed partnerships, private funds and public markets on behalf of its clients;
  • Property: the ownership, operation and development of office, retail and other properties;
  • Renewable Power: operates and develops hydroelectric, wind power and other generating facilities;
  • Infrastructure: the ownership, operation and development of utilities and agricultural operations, among others;
  • Residential Development: homebuilding, condominium development and land development;
  • Service Activities: construction management and contracting services and property services;
  • Private Equity: the investments and operations overseen by its private equity group;
  • Corporate Activities: the allocation of capital to its operating platforms.

If you go to the company’s website and select “Shareholders” at the top of this page you will see there are 4 Limited Partnerships in addition to BAM.

I view BAM like a chair. Each Limited Partnership is a leg and BAM is the seat. I personally prefer to sit on the seat as opposed to a leg hence the reason why my exposure is at the BAM level.

Bloomberg September 20, 2017 Interview – Bruce Flatt, CEO

Bruce Flatt was recently interviewed on Bloomberg where he discussed challenges and opportunities.  I highly encourage you to listen to the 7:37 video.

Listen to Mr. Flatt’s explanation about the nature of BAM’s investments and the level of due diligence that is undertaken before entering any country and making major investments.

My Rationale for Investing in BAM

I began acquiring BAM shares during the Financial Crisis (February 12, 2009 to be precise) and have subsequently acquired more shares. As previously noted, we now own BAM shares in different investment accounts.

I chose to invest in BAM because I wanted exposure to countries which exhibit the following characteristics:

  • the average age of the population is younger than in the more developed countries;
  • significant infrastructure improvements are required (eg. dams, highways, ports);
  • no wars or major armed conflicts (ie. I have no interest in companies with exposure to Afghanistan, Syria, Ukraine);
  • the government is elected through fair elections. This eliminates countries such as Russia and Venezuela.

The beauty about investing in BAM is that it is fully aware of the risks associated with making major long-term investments in lesser developed countries. As a result, BAM conducts extensive due diligence before making any initial investment in a country. This is something I am in no position to do and am happy to leave in BAM’s capable hands.

BAM also invests in the US, Canada, Australia, and members of the EU. This appeals to me as exposure to investments in these countries help offset the risks associated with investments in countries which are experiencing higher levels of growth and in which BAM is increasing its exposure (eg. Brazil, Chile, China, Colombia, India, Peru, South Korea).

Go to BAM’s December 31, 2016 Form 40-F. Once you open this pdf document you can search within the document for the countries listed above. You will get more visibility as to BAM’s exposure in these countries/regions.

I highly recommend you read Part 1 – Overview and Outlook in this Form 40-F. It begins on page 62 of the pdf document. In addition, I cannot possibly begin to condense within this post the “Business of The Corporation” section found in this document. If you are remotely interested in knowing just exactly what BAM does then go to pages 20 – 25 of the pdf document.

I like it when senior management has “skin in the game”. It irks me when senior management has limited real exposure yet stands to benefit handsomely from stock options with extremely low strike prices. Go to page 5 of the 2017 Management Information Circular. Under the Principal Holders of Voting Shares section you will see that senior management has some serious “skin in the game”.

BAM attracts institutional and sovereign money for the purpose of making long-term investments. I strongly suspect they have confidence that BAM knows what it is doing.

I am always concerned about the credit quality of the companies in which I invest; BAM’s credit ratings from DBRS, S&P, and Moody’s can be found in the Ratings and Liquidity section on page 33 of the December 31, 2016 Form 40-F. I suspect some investors pay little attention to the credit ratings of the companies in which they invest and focus almost exclusively on the company’s dividend yield. In my opinion, this is a recipe for disaster.

I am aware of a newsletter subscription service which lists “the best” 400+ companies with 5%+ dividend yields and another newsletter that provides a complete list of high-yield, tax-advantaged master limited partnerships. While the newsletters strongly encourage subscribers to perform their own due diligence before making any investment, I suspect many skip the due diligence aspect of the investment process and invest primarily on the basis of yield.

I typically shy away from companies with high dividend yields as I associate high dividend yield with greater risk. In fact, I wrote a post about this. I don’t know about you but if a company’s stock has a dividend yield of 7%, for example, in the current low interest rate environment then alarm bells go off in my head.

Were we to experience a significant market correction, however, and dividend yields were to approach abnormally high levels such as during The Financial Crisis then my perception would change. I would dig deeper since these high dividend yields could mean wonderful and rare buying opportunities are being presented.

Investments in BAM’s Limited Partnerships

On page 14 of 225 of the Form 40-F document previously referenced you will see confirmation of the equity ownership BAM has in the 4 Limited Partnerships I reflected in the Introduction of this post.

Some investors gravitate toward BAM’s Limited Partnerships because of their dividend yield. If you fall in this camp, I strongly suggest you access the “Shareholders” sub-menu on BAM’s website. Select BAM or the Limited Partnership of your choice and go to “Stock & Distributions”. Look at the “Distribution History” where the distribution policy is laid out.

In the case of BBU, for example, it is clearly spelled out that distributions to unit holders are determined by BAM. BAM has adopted a distribution policy under which BBU will pay a US $0.0625/unit quarterly cash distribution (US$0.25/unit annually) and this distribution is not expected to grow as BBU intends to reinvest its capital. If you are seeking dividend yield this clearly is not the entity in which you want to invest.

Dividends, Dividend Growth, and Capital Gains

If dividend income is your primary driver when making investment decision, BAM is definitely not going to be at the top of your list; BAM’s recent dividend history can be found here. The elimination of BAM as a potential investment because of its low dividend yield and low dividend growth, however, would be a real shame.

While the past does not predict the future it certainly is nice to have some kind of track record to which you can refer. Go to BAM’s investment calculator to see how an investment in BAM would have fared.

In my case, if I isolate our initial purchase made February 12, 2009, that investment has appreciated in value by 377.02% for an annualized yield of 19.89%; the calculator does not work for some reason when I select the “dividends reinvested” feature.

Am I upset that BAM’s dividend yield is sub 2%? NO!

Valuation

Is BAM expensive? Yes. No. Maybe. It is all a matter of perception.

Warren Buffett recently came out and said “in 100 years, the Dow will be over 1,000,000”. Then you have a rising share of Wall Street CFOs who think the market is in bubble territory. You also have this story, this story, this story, and this story.

In my humble opinion I think we are long past due a market correction. Over the long-term, however, I suspect whatever market correction we do experience will likely be a blip on the radar.

Our Situation and Strategy

While I have a strong feelin’ a market correction will occur in the not too distant future I have been acquiring shares in various companies in recent months. My investment time horizon, however, is quite lengthy. Your investment time horizon, however, may be shorter or your investor temperament may be entirely different from mine.

My wife and I are retired which influences my investment making decisions. Commencing in 2018 will be relying on dividend and rental income to sustain our lifestyle; we have no intention of applying for Canada Pension Plan benefits until we reach 71.

We will be implementing a registered retirement savings plan account meltdown strategy for roughly 14 years since at the age of 71 we will need to convert these accounts to registered retirement income funds. If we do not start this meltdown strategy now then all mandatory annual registered retirement income fund withdrawals will place us in the highest income tax bracket; the non-registered account investments will be left untouched.

In 2018, our registered retirement savings plan account withdrawals will be taxed as follows:

Withdrawal Amount and % Federal Tax Withheld

  1. $0 – $5,000: 10%
  2. $5,001 – $15,000: 20%
  3. Greater than $15,000: 30%

The bulk of these withdrawals will be from dividend income we will no longer be reinvesting. We will, however, need to sell some shares otherwise the meltdown strategy will not work. Our plan is to reinvest the after tax component in non-registered accounts that we will not need to sustain our lifestyle.

All our BAM shares are held in a TFSA or in a non-registered account. I will acquire additional BAM shares over the course of time and they will be held in these type of accounts.

Brookfield Asset Management Stock Analysis – Final Thoughts

It is no secret that I am a fan of BAM. I have invested in BAM and I suggest you give it a serious look as a potential investment if you are currently not a shareholder. Much, however, depends on your investment goals and objectives so please do not rely solely on my opinion/perception of BAM.

I strongly suggest you hold BAM shares for years if you intend to initiate a position.  If you listened to the Bruce Flatt interview you will see BAM’s investments are of a long-term nature. It would strike me as bizarre if you were to invest in BAM and your primary objective were for quick capital gains. This is a company whose focus is on the acquisition of long-term assets that will be considerably more valuable many years down the road.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long BAM.

I wrote this article myself and it expresses my own opinions. I receive no compensation and have no business relationship with any company mentioned in this article.

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3 thoughts on “Brookfield Asset Management – Calling All Long Term Investors”

  1. Chuck, I am very impressed by the depth of research and the various considerations that you have looked at and I am confident that BAM is a solid company and that it will likely have a great long term future.

    Still, it is not the kind the company I am likely to buy at this point in time.

    The main issue for me is that post financial crisis, we have come through a period of unprecedented quantitative easing with interest rates declining over the last 8-9 years to near zero. During this period, nearly every asset class has increased in value, around the world, stock, bonds, real estate etc including the share price of BAM that you purchased in 2009.. During this period, everyone from governments to corporations and individuals, given low borrowing costs, have loaded up on debt. We are now at or near the bottom of the cycle, and rates are likely to go up. In such an environment, I am not sure I want to own the type of assets BAM holds, despite the fact that I am sure they have allowed for interest rate risks by proper matching, country risk etc. (I also have concerns about consumer and corporate debt, house prices etc and the impacts they may have)

    I would also agree that high yields are usually a sign that a company has issues. In general, to me dividends are not an important consideration as I prefer companies reinvest in the business they no best, their own company. I like companies that are growing their businesses due a significant economic moat, afforded to them by virtue some kind of disruptive innovation.

    As for 7% yields, just today I came across a seekingalpha article on Dream Global, a company that I own and have added to recently when the share price was below a secondary offering. As the title says, it not only has yield but significant upside due to an astute management, with whom I am familiar.

    https://seekingalpha.com/article/4109144-7_2-percent-yielding-reit-large-upside

    Today, I prefer owning large US banks that would benefit from higher interest rates and a steepening yield curve. I have in this space recently took a position in XLF, a US ETF by way of a synthetic long position using options.

    Thanks for sharing your ideas,

    andrew

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