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Fund manager picks 3 ASX income shares to prosper despite higher interest rates

Last Friday BKI Investment Co Ltd (ASX: BKI) released its Quarterly Report. BKI is a listed investment company (LIC) worth over $1 billion. In this report, Contact Asset Management (the manager of BKI) highlighted the increasing interest rate environment overseas and the flow on effects to markets and ‘bond proxy’ income shares.

Contact noted: “While we recognise the importance of interest rates on the valuations of businesses, we have witnessed on several occasions the market being overly pessimistic on the impact of rising rates on the bond proxies. Stocks with large levels of headline debt such as TCL, APA and SYD get caught up in this scenario every time this occurs. These three companies in particular are better than that. They fix long dated debt out 10-20 years at levels well within their scope of payback.”

The three companies discussed were Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and APA Group (ASX: APA).

Transurban

The weighted average debt maturity for Transurban is 9.3 years, and the average cost of debt is 4.9%, so the toll-road operator is not overly affected by recent moves in bond yields.

On top of that, Transurban has extremely reliable revenues and the ability to increase tolls with CPI, or often greater than that.

It currently trades on a dividend yield of 5%, with future cashflows underpinned by projects underway, toll increases and population growth.

Sydney Airport

The average maturity for Sydney Airport is mid-2024, and the average cost of debt is 4.8%. Future revenue looks set to be much higher than it is today, as Contact noted:  

“In its Master Plan 2039, Sydney Airport expects international travelers passing through its terminals to double over the next two decades and underpin an expected 50% increase in passenger numbers (from 43.3 million in 2017 to 65.6 million in 2039).”

Sydney Airport is probably the best way to capture the benefits of the tourism boom. It currently trades on a dividend yield of 5.5%.

APA Group

There was less said about APA Group, although the message was the same. Contact (BKI) expects resilient and growing revenues to more than cover any increase in interest costs over time, with expected dividends from the company to continue growing as well.

It’s another business with monopoly-like features which should hold up well through a downturn and provide a reliable income stream for investors. APA currently trade on a dividend yield of 5.3%.

Motley Fool contributor Dave Gow owns shares of Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. 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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