The Sydney Airport Holdings Ltd (ASX: SYD) share price has tumbled 16% since the beginning of September.
Are Sydney Airport shares set for a hard landing?
Over the five years to September 2016, Sydney Airport shares rallied 146% — not including dividends — putting the recent share price fall in perspective. During this time, global markets were supported by record-low interest rates and 'helicopter' money from central banks in the aftermath of the financial crisis of 2008-2009.
Naturally, many investors piled into shares of 'safe' companies that offered hefty dividend yields, like Sydney Airport, Telstra Corporation Ltd (ASX: TLS) and the major banks, to name just a few.
As well as paying a large dividend, Sydney Airport continues to see record passengers flow through its airport. This supports its revenue from aeronautical services, which include fees for the use of its infrastructure by airlines. It also supports retail foot traffic. On this front, Sydney Airport has done a good job driving revenue higher.
However, on the cost front Sydney Airport has also benefitted. The cost of financing, which is a major expense for an infrastructure business like Sydney Airport, has less than halved since 2011, from $490 million to $219 million. Interestingly, despite the lower costs, total debt has increased from $6.9 billion to $8.5 billion.
End of the credit cycle
Looking ahead, some forecasters expect global interest rates to continue rising, meaning a higher cost of debt. So although the winding down of interest rates provided a two-pronged tailwind for dividend stalwarts with huge debt piles in 2011, the reverse may now be true.
Foolish takeaway
From this simple 'top-down' view of the Sydney Airport investment case it is clear that the easy money on dividend shares may be gone. I am not suggesting a crash landing in the company's share price by any means, but investors should consider the share price valuation relative to the expectations of higher interest rates and its effect on debt costs. Personally, I think there are better dividend shares available for investors to buy today.
