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Is the Sydney Airport share price a buy for 2020?

The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price had a strong year last year, outperforming the S&P/ASX 200 Index (INDEXASX: XJO) in 2019. However, can this growth continue during 2020?

What makes the Sydney Airport business model attractive?

Sydney Airport is a pure monopoly, which gives it enormous pricing power. This can be illustrated by the extraordinarily high parking fees in its car parks. The airport’s monopoly status also enables it to fully tap into and leverage all the growth in its industry segment as passenger numbers continue to climb, driven by increasing domestic and international travel.

Sydney Airport also has a diverse earning base. In addition to charges to airlines, it generates revenues from retail operations, property rentals, car rental concessions, security and parking and ground transport services. Increasing passenger numbers is driving its duty-free business, especially in core liquor, perfume, and cosmetics categories. Increasing numbers are also increasing demand for retail space in its terminals.

Sydney Airport pays a dividend yield of 4.4%, although it is unfranked, meaning investors don’t get the 30% tax rebate that they get on other fully franked shares such as Wesfarmers Ltd (ASX: WES), BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA). However, I believe that the company is well positioned to continuing to growing its dividend payout.

It has a price-to-earnings (P/E) ratio of 47.4, which is on the high side, especially for a defensive/income type of share.

Soft recent passenger numbers

In the half year to September 2019, revenues rose 3.4% higher compared to FY18 and totalled $797.1 million.

Sydney Airport’s earnings before interest, tax, depreciation and amortisation rose 4.1% higher to $649.2 million despite a 0.2% drop in passenger numbers to 21.6 million. International passenger numbers climbed 1.9% higher, helping to offset softer domestic passenger numbers. Sydney Airport’s revenue growth is highly linked to passengers entering its airport.

International visitors dropped 0.4% to 1.6 million in December 2019, although a positive sign was a rebound in the number of passengers from China. There was a 1.1% increase in total international passenger numbers for all of calendar year 2019 to 16.9 million. Domestic travellers dropped slightly by 0.5% to 27.5 million during this period. It is highly likely that international passenger numbers will be impacted by the bushfires in Australia in the next month or two, however I see any impact as very much temporary.

A more positive outlook for 2020

I believe with the general outlook for travel in 2020 improving, there’s the potential for growth in 2020 as Sydney Airport’s domestic and international passenger numbers could climb higher. Record-low interest rates from the Reserve Bank of Australia could also assist to drive growth amongst domestic travellers. In addition, the weaker Aussie dollar could make Australia an attractive destination for overseas travellers.

Foolish takeaway

I don’t expect to see its Sydney Airport’s share price grow as strongly in 2020 as it did in 2019, however I still think it worthy of consideration to purchase as part of a diversified portfolio with a long-term outlook in mind.

With its monopoly status, low operating risk and rising passenger numbers, Sydney Airport is positioned well for strong growth over the next decade.

Another infrastructure provider I would also consider purchasing is Transurban Group (ASX: TCL).

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Motley Fool contributor Phil Harpur owns shares of Commonwealth Bank of Australia. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of Wesfarmers 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.

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