Is the Sydney Airport Holdings Ltd share price a buy for its 5% yield?

The Sydney Airport Holdings Ltd (ASX: SYD) share price has shot up to $6.93 over the past week, should we be interested at the current price?

Sydney Airport Holdings is the company that runs Sydney Airport. There are people both positive and negative on the company, so here are the reasons to be a bull or a bear:

Buy case

Infrastructure is very important for cities. There is an interesting investment theme where more of the human population is living in cities. More people in a city means more people will use the airport. Sydney Airport may be able to offer investors a more defensive earnings profile than the average Australian investment.

Sydney Airport is experiencing an international passenger boom. America’s ageing population is resulting in more tourists visiting Australia. There is a large increase of Asians visiting the country for tourism, education and other reasons.

In its March 2018 year-to-date passenger update Sydney Airport revealed 2.9% growth of domestic passengers and 6.2% growth of international passengers. In March, Indian passengers increased by 28.2%, Chinese passengers increased by 19.9%, South Korean passengers increased by 15.2% and American passengers increased by 14.3%.

Sydney Airport is also investing in expanding its facilities which should it will be able to increase earnings even more over time.

Sell case

Sydney Airport is a quality business, but it is trading at a high valuation. At 39x FY18’s estimated earnings it isn’t cheap for a business that grows in the teen percentages.

Another problem for Sydney Airport is that interest rates are rising. This could have a double negative – the interest expense for Sydney Airport could increase and the market may pay less of a multiple for those earnings.

In the long-term, the planned second airport in Sydney could take away some of the passengers, which would decrease revenue. Although, perhaps Sydney Airport could replace that with higher-value flights.

Foolish takeaway

Sydney Airport is currently yielding 4.97%, which isn’t bad but I think there are better options for income such as WAM Capital Limited (ASX: WAM). At the current price I don’t think Sydney Airport is a buy but if it were below $6 it would be interesting.

Instead, I think this top income stock would be a better choice for income as it just grew its dividend by over 25%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.

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