Editor’s note: “7 Infrastructure Stocks to Buy Ahead of Big Federal Spending” was previously published in July 2020. It has since been updated to include the most relevant information available.
More infrastructure spending is coming soon. Indeed, the main question is how much Congress will approve. That’s because the current infrastructure funding law that is in place will run out in September. It’s hard to imagine that the politicians would leave infrastructure unfunded, particularly right ahead of the election. As such, it’s a great time to put these seven infrastructure stocks on your radar.
Where do we stand now? In June, President Donald Trump laid out the groundwork for a $1 trillion infrastructure package. It would include the usual spending on hard assets like roads, bridges and airports. However, it would also include some more novel spending such as on 5G deployment and rural broadband networks.
The Democrat-controlled House of Representatives, by contrast, passed its own $1.5 trillion infrastructure initiative on July 1. However, it includes a lot of spending on fighting climate change that does’t have Republican support. As such, the Senate hasn’t moved to approve the House bill.
Presumably, there will be negotiation to bring the two sides together in coming weeks.
With the nation’s economy ailing and the unemployment rate surging, now is a logical time to put federal funds to work. The November election in particular should ensure that the two sides come to a bipartisan agreement, as representatives will want a concrete achievement to show their voters.
As such, you have to be looking at infrastructure stocks right now. Here are seven to have squarely on your radar:
- Ericsson (NASDAQ:ERIC)
- American Tower (NYSE:AMT)
- Williams (NYSE:WMB)
- Union Pacific (NYSE:UNP)
- Enbridge (NYSE:ENB)
- Fluor (NYSE:FLR)
- Nucor (NYSE:NUE)
Infrastructure Stocks: Ericsson (ERIC)
With 5G squarely on the infrastructure agenda, Ericsson should be a clear beneficiary. Remember that the Trump administration has made a huge point of excluding Huawei from 5G networks, both in the United States, and among allies. That gives Ericsson and Nokia (NYSE:NOK) an advantaged position, as they’re the only players capable of delivering large quantities of the needed networking gear in a hurry.
Put another way, if Trump wants to make a flashy 5G announcement before the election, Ericsson and Nokia will almost certainly be involved. That’d be a big aid to to those companies.
Ericsson stock has performed well in 2020, despite the global economic slowdown. That’s because Ericsson has been picking up more and more 5G business as governments and telecom companies shy away from Huawei.
The upcoming infrastructure package should accelerate that transition for Ericsson and Nokia.
American Tower (AMT)
The build-out of 5G networks should drive more mobile data demand. And for that, all roads lead through the cell phone tower companies.
American Tower is the king of this space, as it owns and operates more than 180,000 towers across the U.S., Europe and various emerging markets.
Currently, it generates more than half its revenues from the United States, but it has a large and increasing presence in India and Brazil, among other fast-growing countries.
This gives American Tower the ability to capitalize on increased government spending on 5G rollouts both in the U.S. and internationally. This is low-hanging fruit as governments seek to create jobs and boost their economies coming out of Covid-19.
American Tower’s operating results have been strong, even despite the coronavirus. People are still using their phones as much –or more frequently than before. And it highlights a strong point in American Tower’s story — it builds towers with spare capacity and gradually earn additional revenues as more demand comes online.
All this points to more towering gains for AMT stock in coming years.
Infrastructure Stocks: Williams (WMB)
Recently, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) announced that it invested nearly $10 billion into the natural gas pipelines sector. Berkshire is buying assets from utility company Dominion Energy (NYSE:D).
Dominion is leaving the natural gas pipeline arena. In addition to selling off its existing assets to Berkshire, it canceled its proposed $8 billion Atlantic pipeline project.
This is good news for U.S. pipeline companies. Industry consolidation is a plus, as it tends to reduce competition and raise profit margins. Also, Berkshire Hathaway is a high-quality buyer. Many investors have fled pipelines and midstream energy in recent years. Warren Buffett busting out his checkbook should reassure nervous investors.
Williams is one of the nation’s larger operators; even now, it still has a market capitalization of around $22 billion. However, the company has a large amount of leverage, and, as such, has seen a highly volatile stock price. WMB stock lost as much as 65% of its value in the March crash before bouncing back.
Now, however, the promise of more infrastructure spending could finally provide stability for the pipeline companies. Williams, as one of the big players that is still standing, should benefit from this influx of capital.
Union Pacific (UNP)
You’d think that the railroad stocks would be getting crushed given the economic realities of the coronavirus. Instead, the sector has held its ground pretty well.
Union Pacific sold off sharply in March, but has nearly recovered all its losses over the past few months.
That makes sense. The outlook for U.S. railroads remains fairly bright. The railroads are monopoly assets — it’s nearly impossible to build new ones as competition. Thus, when the government pumps more money into infrastructure to strengthen the nation’s logistics networks, a few established railroads will be set to cash in.
Even with the economic downturn, shipping volumes have been alright. Analysts see Union Pacific earning more than $7 per share going forward. That’s not a boom year for the railroad by any means. However, it results in a price-earnings ratio of less than 23x even at an economic trough.
The stock also kicks out a reliable dividend which currently comes in at 2.3%. That’s not a bad price, and it leaves room for upside as the economy gets back on track.
Infrastructure Stocks: Enbridge (ENB)
While Enbridge is headquartered in Canada, it has substantial exposure to the U.S. pipeline market as well. And, unlike many of the U.S. operators, Enbridge has maintained a strong balance sheet.
It didn’t lever up too much, nor did it pay an excessively high dividend. As such, it’s held its ground despite the brutal downturn in the energy sector.
This puts Enbridge in good position now. The pipeline industry is clearly consolidating. Marginal firms like Dominion are selling off their assets. Regulatory crackdowns are killing new pipeline projects, and even threatening existing ones such as Energy Transfer’s (NYSE:ET) Dakota Access pipeline.
All of these factors increase the value of Enbridge’s already-operating natural gas assets. Over time, as more weak players exit the industry, the leaders like Enbridge will absorb capital and see their profit margins rise. And, at current prices, ENB stock throws off a solid 7.5% dividend yield as well.
One category of infrastructure stocks that should do well are the construction and maintenance companies. These are the firms that design, build and maintain the world’s most complex hard assets such as power plants, mines and bridges. Fluor is one of the global leaders, as it operates in dozens of countries across six continents.
Fluor earns a sizable chunk of revenues from North America, and thus is well-positioned to benefit as more federal infrastructure spending occurs. In fact, Fluor just this week pulled in a new contract from the federal government dealing with deactivation, decommissioning and removal of nuclear plants.
FLR stock has been underwhelming in recent years. That’s understandable, as much of the company’s work revolves around oil and gas, mining and other such commodity projects. With emerging markets slumping and China’s economy showing strain, Fluor has seen a decline in revenues and earnings.
However, as governments unveil huge spending projects to try to reinvigorate their economies, Fluor could find itself at an inflection point where revenues and earnings finally get moving upward again.
Infrastructure Stocks: Nucor (NUE)
Many investors avoid the steel sector — and with good reason. In general, steel stocks have delivered poor results compared to the S&P 500. However, Nucor has crafted out a niche for itself within the steel arena.
By focusing on smaller plants that specialize in higher-margin, value-added profits, Nucor has continued to make money even as most North American steelmakers have struggled to fend off bankruptcy.
Nucor rode the last commodities boom hard. NUE stock shot up from $10 to a peak of $80 in the early 2000s. Since then, the stock has languished. However, the underlying business continues to perform alright. That makes it a good fit on this list of infrastructure stocks to buy.
Profits have been fairly stable, and Nucor pays a rising dividend. In fact, despite being in the notoriously boom-or-bust steel industry, Nucor has paid an increasing annual dividend for 46 years in a row. With the stock yielding 4% now, Nucor is an interesting option for income investors that seek to cash in on more infrastructure spending in coming years.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned ENB stock.