Why this favourite but expensive dividend stock can run higher still

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

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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%.

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.

More on ⏸️ Income

⏸️ Income

2 quality ASX dividend shares to buy today

Here's why Coles Group Ltd (ASX:COL) and this ASX dividend share could be quality options for income investors right now...

Read more »

piles of australian one hundred dollar notes
⏸️ Income

Got money to invest for dividends? Here are 2 ASX shares

Do you have some money to invest ASX shares for dividends? One idea could be shoe business Accent Group Ltd…

Read more »

man handing over wad of cash representing ASX retail capital return
⏸️ Income

2 top ASX dividend shares to buy for your income portfolio

BWP Trust (ASX:BWP) and this top ASX dividend share could be great options for your income portfolio. Here's why...

Read more »

a woman
⏸️ Income

2 ASX 200 shares to buy for income

The 2 S&P/ASX 200 Index (ASX:XJO) shares could be worth buying for income, including Premier Investments Limited (ASX:PMV).

Read more »

⏸️ Income

2 ASX dividend shares to buy with yields above 4%

These 2 ASX dividend shares have yields above 4% and could be worth buying for income including Brickworks Limited (ASX:BKW).

Read more »

ASX expensive defensive shares man carrying large dollar sign on his back representing high P/E ratio or dividend
⏸️ Income

2 blue chip ASX dividend shares in the buy zone

Westpac Banking Corp (ASX:WBC) and this blue chip ASX dividend share could be top options for income investors right now...

Read more »

A row a pink piggy banks ranging in size from small to big, indicating ASX share price and dividends growth CBA bank dividend increase
⏸️ Income

Brokers rate these 2 ASX dividend shares as buys

These 2 ASX dividend shares are rated as buys by brokers, including the REIT Growthpoint Properties Australia Ltd (ASX:GOZ).

Read more »

blockletters spelling dividends bank yield
⏸️ Income

2 high yield ASX dividend shares to buy next week

Here's why Telstra Corporation Ltd (ASX:TLS) and this high yield ASX dividend share could be top options for income investors...

Read more »