For many investors Sydney Airport Holdings Ltd (ASX: SYD) is viewed as a stable dividend-paying stock. While this may be true, the share price has also more than doubled since 2012 giving shareholders returns well in excess of the S&P/ASX200 (ASX:XJO) (Index:^AXJO).
Working out a valuation for Sydney Airport can be difficult due to the complex accounting methods used in its financial statements, but here are five easy to understand points which might help investors understand the business more clearly:
1. Distributions have been growing steadily over the past four years in line with increasing cash flows. This may be one of the most important considerations for investors especially those who are looking for a growing stream of dividends.
Source: Company reports
At the current share price, investors can expect to receive an unfranked dividend yield of around 4.7% for FY15. This is expected to grow to 5.1% for FY16 according to analyst forecasts.
2. Passenger numbers have been increasing steadily and management has been able to convert this into improved financial performance. Strong growth in international inbound traffic has resulted in a 2.0% increase in total passenger traffic growth for the year to date. As the graph below shows, Sydney Airport has been able to increase passenger numbers consistently over many decades. 
Source: Company reports
More recently, Sydney Airport has benefited from the surge in tourists coming from Asia. Passengers coming from China increased by over 16% last year and this remains the largest growth market for Sydney Airport.
A number of tailwinds including cheaper airfares from reduced oil prices, new free trade agreements and new air service agreements with China will also help Sydney Airport maintain passenger growth numbers.
3. Sydney Airport generates more than half of its revenue from car parking, its property portfolio and retail operations. It recently awarded a new duty free contract which should see a substantially improved customer experience. Sydney Airport has also undertaken new renovations which will see 15 refreshed and new tenancies. The company also has approval for a new 126-room hotel which will expand its property portfolio and provides a potential growth driver in the future.
In FY14 Sydney Airport generated $140 million from car parking alone. Anyone who has needed to park at Sydney Airport knows how expensive it can be and Sydney Airport has taken advantage of this by increasing the number of parking spaces by 964 in 2014 with further enhancements planned for the coming years.
4. Sydney Airport is aggressively geared with $6.6 billion in net debt. The debt profile is complicated with multiple structures but the company has been working to spread and lengthen its maturity profile. This has reduced re-financing risk but investors need to be aware of the risks involved when investing in companies with such a high level of gearing.
5. Sydney Airport is currently evaluating the opportunity to develop and operate the Western Sydney Airport project. The company has an expert team working in consultation with the government and a final decision by the company should be made within the next 12 months. The project will be complex and is not expected to be operational until the mid 2020's but investors should be aware of the impact this could have on existing operations.
Foolish takeaway
The complex financial and debt structures of Sydney Airport makes it difficult for many investors to use traditional valuation methods such as the price-to-earnings ratio. Instead, the dividend yield can become the focus for many investors as this can be calculated more easily. While the current yield looks attractive, I would be hesitant to buy shares at the current price. I think there could be more downside in the share price once global interest rates start to rise and people shift away from high dividend-paying stocks. I will be keeping Sydney Airport on my watchlist and if the share price drops below $4.20, I would tempted to have a closer look.
