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Auckland International Airport Ltd vs Sydney Airport Holdings Ltd: Which should you buy?

Airports all over the world have benefited from booming tourism rates and the increasing number of airlines that fly to and from new destinations. Auckland International Airport Ltd (ASX: AIA) and Sydney Airport Holdings Ltd (ASX: SYD) have been no exceptions to this and it is interesting to note the long-term share price performance of both airports.

As the chart below shows, even though both companies have easily outperformed the S&P/ASX200 (ASX:XJO) (Index:^AXJO) over the past ten years, Auckland Airport’s share price has comfortably outperformed Sydney Airport by more than 60%.

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There is an important point to note here though – this does not include the dividends paid by each company. According to Morningstar, the total average annual return (dividends + capital gains) over each of the last ten years for Auckland Airport and Sydney Airport is 13.0% and 13.6% respectively. So although Auckland Airport has provided better capital gains, Sydney Airport has provided investors with a much higher level of dividend income.

Investors can see both airports have provided a similar return over the past ten years but is there one that could outperform over the next few years?

Only time will tell, but here are a few points about each airport that could help to predict their future performance:

Sydney Airport

Sydney Airport is viewed as one of Australia’s premier infrastructure investments. Investors are attracted to the defensive nature of its earnings and the consistently growing dividend. At the current share price, investors can expect to receive an unfranked dividend yield of around 4.6% for FY15 and this is expected to grow to around 5% in FY16 (assuming a constant share price).

Strong growth in international inbound traffic has resulted in a 2% increase in total passenger traffic growth for the year to date. Passenger numbers have been increasing steadily, especially from China, and management has been able to convert this into improved financial performance.

Sydney Airport has also diversified its earnings base and now generates more than half of its revenue from car parking, its property portfolio and retail operations. The airport is investing in new car parking spaces and further enhancing its retail offering that will improve the traveller experience and should also boost revenues.

Recent pricing negotiations will see new international passenger charges increase on average by 2.9% over the next five years. According to management, the agreement includes a five-year investment strategy that will “deliver world class passenger experience improvements, additional capacity to meet new demand and more efficient operations”. With the price increase being higher than the rate of inflation, this appears to be a relatively good outcome for Sydney Airport and should provide a stable platform for further growth.

Auckland International Airport

International passenger growth through Auckland Airport has averaged 4% to 5% per year historically and the latest traffic numbers have shown this is likely to continue for the short term at least with overall passenger growth of 4%.

The May traffic numbers also confirmed the continued strong growth from Chinese and Indian visitors, with arrivals increasing by 46.4% and 12.0% respectively. In the past 12 months, the number of travellers from these two countries passing through Auckland Airport has increased by around 30%.

Just like Sydney Airport, Auckland Airport also earns a significant portion of its earnings from non-aeronautical operations. Its car parking, retail and property operations are all growing strongly with plans for further expansion. Interestingly for investors, Auckland Airport has shares in both Queenstown airport and Cairns airport and both airports have contributed double-digit profit growth over the last year.

According to analyst forecasts, investors looking at Auckland Airport for an income stream can expect to receive an unfranked dividend yield of around 3.1% for FY15 and this is forecast to increase to 3.3% for FY16.

Verdict

Although both airports have performed similarly over the past ten years, Sydney Airport would be my preferred investment right now.

Both airports will benefit tremendously from the surge of new tourists expected from Asia but I think Sydney Airport’s stronger diversified earnings base makes it best suited to take advantage of this over the long term.

The higher dividend yield will also attract more income hungry investors and this should provide good support for the share price while interest rates remain at record lows.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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