Sydney Airport (ASX: SYD) has been a great stock. In fact it was the very first share I ever purchased, back when it was $2.16 and known as MAP (for Macquarie Airports).
Over the years it traded out its interests in foreign airports for cash and an increased share in Sydney Airport (of which it was only a part-owner). The cash was largely paid out to investors in the form of special dividends; in the four years I owned it, I received more than half of what I paid for the share as dividends. Not to mention its reasonable capital growth, to the point where I sold in April at $3.50.
Sydney Airport is now trading at around $4.00, and while you might think I would be kicking myself for missing out on the extra gain, I'm not. This is simply because if it is growth you're after, there are better options in the market at the moment.
The growth in Sydney's share price over the past 12 months is most likely due to the huge influx of cash that is no longer earning a reasonable return (due to interest rate decreases) in term deposits and savings accounts. Certainly Sydney Airport's fundamentals have not improved substantially in that time.
Sydney Airport is now trading at a price-to-earnings equation of approximately 40, which is extremely high. Furthermore Macquarie Group (ASX: MQG), Sydney Airport's previous parent company, is making moves to dispose of all of its remaining shares in Sydney Airport to Macquarie shareholders. Subject to shareholder approval, Macquarie will lose approximately $1.4 billion from its asset base, and will use this to shrink the number of securities it has on issue by approximately 5%.
While Macquarie claims to be using the disposal of Sydney Airport to shrink its number of securities on issue instead of conducting a share buyback, one cannot help but wonder if Macquarie is shrewdly reallocating capital into a better investment, namely itself. After all, Sydney Airport has been unimaginative at best in the way it has grown its business.
Over the past several years Sydney Airport has paid out virtually all of its incoming cash to shareholders, keeping none for expansion or acquisition. In its defence, it does have a cool $400 million cash in the bank, but it is disappointing that management has not been able to find anything to do with all that money.
Sydney Airport recently went on record to state that Sydney did not need a second airport, and writer Mike King suggests in this article that the company is protecting its monopoly. However with $400 million in cash and paying around the same each year in dividends, if the airport kept back just 10% of its dividends each year, it could almost fund the second airport on its own, expanding its monopoly and earning even greater returns for shareholders.
Foolish takeaway
As a growth stock, Sydney Airport has done all the growing it's likely to do for the foreseeable future. The price is now equal to its previous heights just before the GFC; $4 each is great value if you're selling. One of Sydney's biggest shareholders is hoping to reduce its shareholding to nothing, and it simply wouldn't be doing that if Sydney Airport was the best place to keep its money. It might be time to look at reducing your Sydney holdings and reallocating the capital elsewhere.
If, however, you are after consistent dividends and a financially secure company that earns basically a guaranteed income year after year, Sydney Airport is a great share to hold. I still wouldn't be buying it, but I would be comfortable holding it as long as I bought it at around $3-$3.50.
