The two listed airports on the ASX are Sydney Airport Holdings Ltd (ASX: SYD) and Auckland International Airport Ltd (ASX: AIA). They have been exceptional investments for shareholders over the last five years, delivering a total shareholder return of 96% and 165% respectively.
However, the earnings and dividends of these assets have not grown anywhere near as much. Investors have flocked to infrastructure assets in the hope they can provide safe returns. Perhaps the dividends are reliable, but share price growth at these prices is not.
It's a shame both stocks are so expensive because there's a lot to like about them.
Growth in traffic
There is an increasing amount of tourism coming from Asia, most of the tourists will probably transit through Sydney Airport if visiting Australia, or through Auckland Airport if visiting New Zealand. In the latest Sydney Airport passenger update for September 2016, the number of international passengers had grown by 8.6% compared to September 2015.
The large baby boomer population in Australia and New Zealand also want to travel the world, so they will likely travel via Sydney Airport or Auckland Airport.
The interconnected nature of the world means there is a growing amount of air freight shipments that travel through the two airports.
Dividends
Sydney Airport impressively grew its dividend by 21% in FY16 compared to FY15. Auckland Airport grew its dividend by 17.7% during FY16.
Having reliable dividend payers as part of a portfolio is always appealing. They are both forecast to keep growing too.
Sydney Airport is forecast to grow its dividend by 9.6% in FY17 and Auckland Airport is expected to grow its dividend by 11.4% in the same period.
Monopolies
Sydney Airport has a monopoly on air traffic arriving into Sydney. Even if a second airport is built, it has first rights to it.
Auckland Airport similarly has control of air traffic coming to Auckland. It also owns 24.55% of Cairns And Mackay airports in North Queensland, as well as 24.99% of Queenstown airport.
Having a monopoly, or a strong economic moat, is one of the key things Warren Buffett looks for.
What's holding me back?
The valuation for the airports is simply too high for me to stomach. There are 'safer' defensive stocks out there like the funeral operator InvoCare Limited (ASX: IVC), which is trading at 22x FY16's earnings.
Sydney Airport is trading at 37.8x FY16's earnings and Auckland Airport is trading at 40.5x FY16's earnings (Source: Commsec), which puts these two businesses among the most expensive infrastructure stocks in the world.
There are also stocks related to the tourism boom that look much cheaper like Crown Resorts Ltd (ASX: CWN) trading at 18x FY16's normalised earnings.
I'm going to keep these airports on my watchlist for now and wait for a lower entry price with a higher starting dividend yield, Foolish investors may be wise to do the same.