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Up 22% in 2017: Is the Sydney Airport Holdings Ltd share price a buy?

Credit: deeplimo

The Sydney Airport Holdings Ltd (ASX: SYD) share price has risen by 22% in 2017. This has been a strong performance from a defensive stock. Sydney Airport Holdings is the operator of Sydney’s Kingsford Smith Airport.

Here is my bull and bear case for the Sydney Airport Holdings share price over the next few years:

Bull case

Australia is experiencing a large tourism boom from several regions, particularly Asia. All of those tourists will likely get to Australia by flying into the country. Australia’s biggest city is also the biggest draw for tourists.

Sydney Airport is reporting significant growth of passenger numbers every month compared to the prior year’s corresponding month. For example, in its passenger update for April 2017 it revealed that the number of international passengers had grown by 12.1%.

This growth and management’s willingness to pay out large dividends means Sydney Airport Holdings has a trailing dividend yield of 4.46% after increasing its August dividend by 10%.

Bear case

Interest rate hikes in the USA could have a negative effect on defensive shares like Sydney Airport Holdings for two reasons.

The first reason is that Sydney Airport Holdings has a large amount of debt on its balance sheet. At 31 December 2016, it reported that net debt stood at $7.7 billion. Increasing interest rates could increase the finance costs for the business over time.

The second reason is that investors may be less willing to pay a premium for defensive assets when the yield they can get from cash and bonds is increasing. This would hurt the valuation of Sydney Airport Holdings.

In the longer-term I also expect that the second Sydney Airport at Badgery’s Creek may take away some of the potential flights that Sydney Airport could have had. However, Heathrow Airport is a great example of how multiple airports can succeed in the same city.

Time to buy?

At $7.28 I don’t think the shares are a buy. I would want to receive a dividend yield of above 5.5% before considering buying shares of Sydney Airport Holdings. At the moment the shares are yielding 4.46% and it’s currently trading at 39x FY17’s estimated earnings.

I do think the business has a lot of pleasing defensive attributes and should continue to experience good growth, however it will remain on my watch list for now.

For stocks that are on my buy-list you should have a read of this, which includes some of the best growth stocks on the ASX.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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