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Mixed fortunes for these 5 dividend plays

Glenn Freeman  |  23 Jan 2020Text size  Decrease  Increase  |  
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Australia's bushfire crisis has singed Sydney Airport’s international visitor numbers but the company remains a popular dividend stock alongside Auckland International Airport, Transurban, Atlas Arteria and Aurizon.

International tourism from China is a key reason for the success of Australia's busiest airport, which Morningstar Australia regional director of equity research Adam Fleck awards a narrow moat.

But the growth in international visitor numbers has been slowing during 2019. Another drop in the fourth quarter of 2019, when overseas passengers climbed just 1.1 per cent, caps four straight periods of declining traffic growth.

December last year saw a sharp drop in visitor numbers, and holiday bookings were down between 10 and 20 per cent according to Australian Tourism and Export Council.

The worsening coronavirus outbreak in China is also expected to take a toll on outbound tourism from China.

Visitors to Sydney Airport (ASX: SYD) fell short of Fleck's forecast 2 per cent growth in international traffic, furthering his view that 2019 revenue and earnings could weaken.

But despite the near-term risks, Fleck is sticking to his upbeat long-term forecast.

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"We continue to expect passenger growth in a range of 2 per cent to 3 per cent annually over the next 10 years, with rising passenger fees, increased retail spending, commercial property expansion, and continued cost control driving a 6.6 per cent compound annual growth in earnings before interest, tax, depreciation and amortisation,” Fleck says.

Airports derive revenue from both aeronautical and non-aeronautical operations, including retail leases and car rental services. Retail contributes about one-fifth of total group revenue, and lease-rental revenue from the property and care rental division is among the fastest-growing divisions since Sydney Airport was privatised in 2003.

In the 12 months ending December 2019, Sydney Airport delivered a 4.47 per cent dividend yield.

This compares favourably to the other airport on Morningstar Australia's research coverage list, Auckland International Airport (ASX: AIA), which yielded only 2.44 per cent last year.

But Fleck attributes a wide moat to AIA on account of New Zealand's lighter-touch regulation, which enables the airport to freely set fees directly with airlines.

"Auckland Airport, like most publicly traded airports, can further capitalise on its dominant position through retail, carparking, land development, and other unregulated income streams," Fleck says.

The dividend outlook may be hampered in the medium-term, as the airport undergoes a series of upgrades over the next five years.

This will reduce the free cash that management has on hand, with around NZ$2 billion ($1.9 billion) earmarked for these works. "That said, this spending will position the airport for further passenger growth, with major upgrades to its terminal, airfield, and roads, as well as begin the process to add a second runway."

dividend stocks

Source: Morningstar Direct

Transurban’s bond-like properties

Alongside airports, roads and railways are also prized for their dividends.

Toll road investor and operator of assets in Australia and North America, Transurban Group (ASX: TCL) paid out a 3.87 per cent dividend yield in 2019.

"The core Australian roads are integral parts of the motorway networks in Australia's three largest cities: Melbourne, Sydney, and Brisbane," says Morningstar senior equity analyst Adrian Atkins.

"The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating."

Transurban's operating cash flow increases strongly during the operational lives of the toll road concessions it holds, Atkins says.

"Cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the roads are handed over to the government for no consideration when concessions end.

"In this way, toll-road concessions are akin to amortising bonds, with capital returns a substantial proportion of distributions to investors."

He forecasts distributions of 62 cents per security in 2020, and mid-single compound annual growth of distributions over the next five years. This is underpinned by increasing traffic, toll price increases, and profitability expansion as management boosts efficiency and enjoys strong operating leverage.

Atlas Arteria's road paved with distributions

Atlas Arteria (ASX: ALX) is also a toll road operator, but with the bulk of its operations in Europe. Its dividend yield of 3.67 per cent in 2019 came in just below that of Transurban.

Atkins notes that like most other infrastructure stocks in the current low interest rate environment, Atlas shares are overpriced because they've been bid upwards by yield-hungry investors.

A recent equity raising by Atlas management saw Atkins lift his fair value estimate by 3 per cent to $6.20, "but even the discounted equity raising is too pricey to recommend," he said last month.

The company's largest asset is its Autoroutes Paris-Rhin-Rhone road in eastern France, one of the largest tolled motorways in Europe.

Its other main asset is the Dulles Greenway toll road in Virginia, US.

Atkins forecasts distributions to investors will see a compound annual growth rate in the "low teens" up to 2023.

"This growth in our cash flow forecasts reflect a combination of operating leverage in APRR, reduced interest, reduced tax expense in addition to the expectation that Dulles Greenway will begin paying dividends from 2021," he says.

Aurizon’s size advantage

Rounding out our list of transport infrastructure firms, we come to heavy rail operator Aurizon Holdings (ASX: AZJ), which yielded dividends of 4.26 per cent last year.

The company's rail operations are concentrated in Queensland, where its coal haulage holds significant cost advantages.

"Size and long-term government ownership, while dominating rail haulage in Queensland, have allowed Aurizon to establish large-scale businesses with significant positions in strategically important transportation markets," Atkins says.

He notes that the coal haulage market is highly concentrated, with only a few competitors and a small number of large customers.

Aurizon is also a major bulk-haulage player in regional Western Australia, where it transports iron ore, alumina, bauxite along with grain, sugar and fertiliser. Though a large operation, this part of the company makes up only a relatively small proportion of group earnings.

The company has been helped by elevated coal prices in recent years, but Atkins sees this as only a short-term boost.

is senior editor for Morningstar Australia

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