The Motley Fool

Why this favourite but expensive dividend stock can run higher still

One of the most coveted but overstretched dividend paying ASX shares could run higher despite concerns about its valuation and slowing Chinese visitor growth.

The stock in question is the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price, which gained another 1.1% to $8.23 ahead of the market close to take its one-year gain to 23% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only managed an 8% increase.

Investors have flocked to the stock for its relatively defensive income streams and reasonably high dividend yield, but it isn’t a favourite of mine as the Chinese tourism boom appears to be petering out.

What’s more, our nation’s largest airport operator is locked in tense negotiations with the airlines, including Qantas Airways Limited (ASX: QAN), over access rights and the SYD share price is trading on a price-earnings multiple that’s over 40 times.

Macquarie upgrades Sydney Airport to buy

It feels like a lot of good news is already priced in, although Macquarie Group Ltd (ASX: MQG) thinks the new terminal T4 could be its saving grace and has upgraded its recommendation on the stock.

Macquarie thinks there’s more upside for Sydney Airport despite acknowledging that management needed to lift its service offering while renegotiating with the airlines.

The airport needs to improve its offering because its peers, like the Melbourne and Brisbane airports, are adding new runways, and that puts pressure on Sydney Airport to focus on service quality to better differentiate itself.

“The T4 discussion provides a step change to terminal capacity, and quality. We estimate a new terminal will lift capex spend from ~$1.6bn to $2.3-2.4bn,” said Macquarie.

“Despite shifting to tax paid, SYD’s balance sheet can fund 100% of the capital needed with debt.

The additional capex spend will also mitigate the pricing pressure SYD is facing from falling bonds (150-200bps) and the reset of international PAX outperformance of ~1.4m above forecast.”

Not so expensive after all

The broker also reassures investors that Sydney Airport isn’t expensive. It noted that Hobart Airport was sold at around 26 times its earnings before interest, tax, depreciation and amortisation (EBITDA) – and that is for a lower quality asset.

Ignoring the quality question, Sydney Airport is trading on an enterprise value to EBITDA of around 24 times.

Macquarie lifted its rating on Sydney Airport to “outperform” from “neutral” and has a 12-month price target of $8.77 per share.

Add that with the stock’s forecast yield of 4.7% for 2019 and the total return for Sydney Airport sits at just over 11%.

NEW! Top 3 Dividend Bets for 2019

With interest rates likely to stay at rock bottom for months (or YEARS) to come, income-minded investors have nowhere to turn... except dividend shares. That’s why The Motley Fool’s top analysts have just prepared a brand-new report, laying out their top 3 dividend bets for 2019.

Hint: These are 3 shares you’ve probably never come across before.

They’re not the banks. Not Woolies or Wesfarmers or any of the “usual suspects.”

We think these 3 shares offer solid growth prospects over the next 12 months. Each of these three companies boasts fully franked yields and could be a great fit for your diversified portfolio. You’ll discover all three names and codes in "The Motley Fool’s Top 3 Dividend Shares for 2019."

Even better, your copy is free when you click the link below. Fair warning: This report is brand new and may not be available forever. Click the link below to be among the first investors to get access to this timely, important new research!

The names of these top 3 dividend bets are all included. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free copy right now!

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and 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.

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!