Should you buy Sydney Airport Holdings Ltd?

Sydney Airport (ASX: SYD) is the full owner and operator of Sydney Airport, under lease until 2097. The airport is Australia’s busiest and currently the only regular passenger airport in Sydney, serving interstate, intrastate and international passenger traffic. It has strong competitive advantages stemming from limited competition, a good location and economies of scale. Performance is highly dependent on passenger numbers and tied to economic cycles.

This company reports its financial year as ending 31 December. The last annual report showed improvements in financial returns based on total traffic up 2.6% to 38 million passengers. International traffic increased 4.1%. Subsequently there has been a good start to the 2014 year with January traffic up 4.7% compared with the previous corresponding period (PCP). International traffic in January was up by 8.0% compared with the PCP.

EBITDA for the 2013 financial year grew by 7.3%. Sydney Airport Chief Executive Officer, Kerrie Mather, said “Key drivers of EBITDA growth were international passengers, primarily from China and Asia, capital investment in aviation capacity and facility improvements, and commercial business initiatives. In particular, it has been pleasing to achieve revenue growth and yield improvement due to commercial expansion. Significant customer research and targeted products have translated into increased sales and market penetration.”

Master plan 2033

As recently as the 17 February this year, the Australian government approved Sydney Airport’s 20-year master plan. This outlines Sydney Airport’s plan for the operation and development of Australia’s premier airport for the period to 2033. Forecast demand in 2033 is 74 million passengers, a significant increase from the 38 million in 2013. The initiatives outlined in the master plan are expected to meet the needs of customers by delivering a superior passenger experience, improving the efficiency of the airport, enhancing safety and maximising capacity at Sydney Airport.

A second airport for Sydney

Development of a second Sydney airport is subject to a First Right of Refusal by Sydney Airport, as formulated in the original contract with the Federal government. This means that when the new airport is up and running it may not bring competition in airport charges levied on passengers, airliners or terminal retailers to Sydney.

Thus, margins may be upheld for Sydney Airport, unlike Melbourne airports, which have different owners, and different charges. Exactly how a second airport will affect Sydney Airport is a matter for the future but the implications of First Right of Refusal mitigates future risk.

Auckland International (ASX: AIA) has a market capitalisation of $3.3 billion compared with Sydney Airport at $8.3 billion. Measured over the last 10 years, the annual shareholder returns have averaged 18.4% for Sydney and 14.2% for Auckland. Current dividend yield for Auckland of 3.9% is also behind that of Sydney at 6.5%. Both airports are predominantly involved with tourist traffic and enjoy a long-term increase in traffic volume and average spend, due particularly to the improved affluence of our Asian neighbours. Accordingly, there is virtually no risk of financial failure for these two over the long term.

Foolish takeaway

Sydney Airport is more a steady as it goes type of security than most others. Its dividend yield of 6.5% is attractive but unfranked. Any drop in share price will be reflected in a corresponding increase in dividend yield. Thus, I see this stock as a defensive one, offering resilience to any possible overall fall in the share-market.

Each year or so, the dividend seems to rise one or two cents. For example, this year ending December, the company has forecast a total dividend of 23.5 cents, up from 22.5 in 2013. Therefore, I consider Sydney Airport a good dividend yielder for someone not concerned about receiving franking credits, particularly if there is a downdraft in the market, allowing the shares to be acquired somewhat lower than they are today at $4.12.

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Motley Fool contributor Chris Koenig does not have shares in any of the companies mentioned. 

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