Infrastructure stocks may not be interesting.However, it hits the optimal point for risk-averse investors.

“Infrastructure assets are in a defensive position and are definitely protected from inflation,” said Don Dimitrievic, head of energy and infrastructure credit at Nuveen. As he points out, many of these companies benefit from regular inflation adjustments built into their customer contracts for everything from toll roads to solar energy.

Infrastructure stocks have lagged the major indexes recently, in part due to rising interest rates, but investors are looking at a variety of stocks, including airports, toll roads, cell phone towers, solar and wind power, and the power grid. Being exposed to a business.

Saira Malik, Nuveen's chief investment officer, said infrastructure is “generally a good bet for people worried about a recession.” It's also a way to tap into long-term investment themes, she added, citing utilities, midstream pipeline companies and waste management companies.

Ben Morton, head of global infrastructure at Cohen & Steers, says he's looking for companies that own and operate infrastructure assets, preferably ones with high barriers to entry and reliable cash flow. “Especially in an inflationary environment like today, there is lasting value in assets that are already in the ground,” he says.

Building these assets from scratch or expanding them is costly. Interest rates have been rising rapidly since early 2022 due to the Federal Reserve's fight against inflation, sharply increasing borrowing costs for companies that need to issue new bonds. But once the Fed starts cutting rates, those headwinds should subside.

Rising interest rates are definitely a problem. The FTSE Global Core Infrastructure 50/50 is up about 2% this year, lagging the S&P 500's 10% rise. But that underperformance offers a silver lining: an attractive valuation. Infrastructure stocks as a whole are trading at a discount of about 10% relative to “broader equities,” Morton said.

That's because “people tend to be willing to pay for the predictability of cash flows,” he says, compared to the historical premium for stocks of 11%.

Nuveen's Dimitrievich cites increasing demand for electricity as a key pillar of infrastructure investment, and the rapid growth of artificial intelligence as a foundation for this.

“All of this data processing that we're seeing is a significant consumer of power generation, and that requires a lot of electricity,” he said, adding that the growth of electric vehicles is another factor. he added.

There are several key elements to power grid transformation. First, there's the system upgrade. System upgrades are more than a century old in some cases. The second is to enable the grid to more effectively absorb power from renewable sources. For example, solar energy is generated during the day, but most of the demand occurs in the morning and evening, Dimitrievic says. That creates a mismatch. One of his solutions is battery storage for the power grid, which provides backup power and can be used during peak times.

“From a retail investor perspective, we're going to end up with a lot of public companies being built around energy storage,” he predicts. Only a few of them have come true.

But there are also companies whose businesses include battery storage and other aspects of clean energy, particularly wind and solar power. One is

NextEra Energy
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The company operates Florida Power & Light Utilities and is a leading player in clean energy.

Morningstar analyst Andrew Bischoff wrote in an early March research post about the company that the company is positioned for “the next phase of renewable energy growth in solar and battery storage.” .

In February, NextEra's board of directors announced a quarterly dividend of 51.5 cents per share, a 10% increase from the previous 47 cents. The stock yield is 3.3%.

Another renewable energy initiative is

Brookfield Renewable Partners
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The yield is 6%. Citing the company's strong capital allocation practices, the company is shifting its focus from hydropower to wind and solar power, according to Morningstar.

For example, in February, the company's board announced a quarterly dividend of 35.5 cents per share, a 5% increase from 33.75 cents. The stock yield is 6.2%.

The other is American Tower.
,

The company, which owns and operates cell phone towers in the U.S. and around the world, has a yield of 3.4%. Structured as a real estate investment trust (REIT), American Tower is required to pay out at least 90% of its taxable income to shareholders. The company generated approximately 45% of its sales from overseas in 2023.

BofA Securities rates the stock a Buy, due in part to the company's adjusted cash flow growth and diversified exposure to international and data center businesses. Adjusted funds from operations, a common metric for REITs, should continue to support dividends.

Another attractive attribute for infrastructure companies such as toll plaza operators and energy providers is the ability to include periodic inflation adjustments in long-term contracts with customers.

Case in point: Ferrovial, a Spanish construction company with assets such as toll roads in the US and Canada and shares in UK airports, is able to protect against inflation through flexible interest rate settings. The stock yield is approximately 2%.

Another infrastructure stock to consider is TC Energy
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It is a large Canadian-based company whose assets include power generation and storage, as well as an extensive natural gas pipeline network. The stock's yield is about 7.1%.

Infrastructure stocks may not be the most exciting stocks on the market, but they are a solid long-term component for income investors.

Write destination Lawrence C. Strauss (lawrence.strauss@barrons.com)