The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price has outperformed recently thanks to a number of tailwinds, but the stock could be about to fall from the sky after UBS downgraded the stock.
The SYD share price rallied to a record high of $7.90 on Monday before easing back 1.7% to close at $7.77 yesterday amid the broader market turmoil with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index losing close to 1% on worries of an escalating trade war between China and the US.
Shares in the airport operator has surged over 17% over the past six months as other defensive dividend paying stocks also found favour amid the uncertain economic environment. The Transurban Group (ASX: TCL) share price is 18% ahead while APA Group (ASX: APA) share price gained 12% over the period when the ASX 200 is up 9%.
Downgraded to sell
But Sydney Airport’s golden run could be over after UBS cut its recommendation on the stock to “sell” from “neutral” as it believes earnings growth will be grounded for our nation’s largest airport.
“International traffic momentum was weak in the March [quarter] even after taking account of the Easter re-timing, and airline schedules now suggest ongoing capacity declines for the remainder of 2019,” said UBS.
“Further, domestic traffic has been negative for the last five months and airlines seem to be trimming capacity as Australians fly less.”
The broker noted that international traffic was up 1% in the first three months of calendar 2019, which is in line with airline capacity.
Risk of disappointing
However, airline schedules indicate a 2% drop in capacity for the June quarter and a further 1% in the September quarter.
“Further, Australian resident international traffic (half of total) has slowed from +4-5% to flat during the March [quarter], which could suggest weakening travel intentions due to economic concerns and the weaker A$,” added UBS.
“However, despite our downgrade to EBITDA and cashflow we do not expect the forecast 4% growth in dividend to change. The Board appears committed to sustainable dividend growth and the spread between dividend yield and bond yield is at an almost all-time high of 3.5%.”
What this means is that longer-term investors hunting for yield and willing to overlook the near-term volatility may still be willing to hang on to the stock even though management could soon release disappointing quarterly traffic updates.
Expectations of two interest rate cuts from the Reserve Bank of Australia (RBA) in the coming months certainly increases the appeal of income stocks that can generate profits regardless of the economic cycle.
UBS has a 12-month price target of $7 on Sydney Airport.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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.