The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price has fallen by around 7% over the past month and it's down 12% over the past three months.
Investors are becoming less enthusiastic about defensive businesses like Sydney Airport because they are able to get a decent return on safe assets like US bonds now that the US Fed is increasing its interest rate.
However, despite this recent pessimism around Sydney Airport it's still up nearly 60% over the past five years – which doesn't even include the income distributed.
Sydney Airport has been one of the best blue-chip income shares on the ASX with the income payment going up by double digits in most of the past few years, with this year's annual distribution expected increase by 8.7%.
The distributions have been sustainable increases because the business has also been growing profit nicely thanks to increasing passenger numbers. In the recent half-year result it revealed that earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 8.1%.
In the first half, passenger numbers grew by 3.3% to 21.6 million people. International passengers grew by 5.2%.
Growth of passengers continues, however it seems to be at a much slower pace. In the September 2018 update, year-to-date passenger growth was only 2.9%. October may prove to be a better month with the Australian school holiday falling later.
Foolish takeaway
Sydney Airport is a quality asset, however I don't think it's a buy at this price for two main reasons. The first is that growth is slowing, a business doesn't command as high of a premium if its growth rate is lower. Car parking fees can't go much higher and passenger growth is slowing.
The other main reason is that the US Fed clearly plan to continue to increase interest rates for the next two years, which will likely increase the bond rates and will likely hurt Sydney Airport's valuation more.
At under $6 Sydney Airport could be a decent idea for income investors, but I think investors focused on growth and total returns should look elsewhere.
