For long-term owners of Auckland International Airport shares, it has been a dream run.
An investor who bought $1000 of shares in the IPO in July 1998 and still holds them today will have shares valued at $10,900, plus they will have received a net $709 in capital returns and total cash dividends of $2,993. Importantly, the annual dividend growth has been consistent at around 10 percent per annum: in the 12 months to March 2017, Auckland Airport paid a total of 19c per share in dividends, compared to the 2.6c per share (adjusted) in the year to March 2000.
So what about the outlook? Auckland Airport enjoys a sweet spot of what could be argued as structural tourism growth as more competitive airfares have made travel more accessible, planes have become much larger and can travel further and landing capacity has meant Auckland Airport has regularly announced new airline entrants to the New Zealand market. The significant baby boomer generation are travelling as they ease back from work into retirement and according to Macquarie Research, travel is the number one spending priority for the millennial generation.
Back in 2014 Auckland Airport released a 30-year vision where they expected more than 40 million passengers per year to be passing through the terminal by 2044. Already the growth trajectory is pressuring those expectations with passenger growth up 26 percent in the last three years and the number of international airlines Auckland Airport is servicing up 61 percent over the same time period. Today around 18.6 million people per annum pass through Auckland Airport which grew by 10.6 percent over the previous year.
To meet this demand, a significant amount of development will be required. The recent announcement of $1.8 billion in capital expenditure was met with a mixed response by the market, but clearly to fulfil demand and keep this number of passengers happy and wanting to return to New Zealand is going to come at a cost. Aucklanders reading this will already be acutely aware of the pressure on surrounding roads and infrastructure, let alone what a doubling in airport traffic would do, so the Airport’s commitment to growth has to be met with commitments from local and central government to ensure that the surrounding infrastructure can cope.
The current round of capital spending includes plans to merge the domestic and international terminals, more contact gates for the growing international aircraft fleet of larger planes including the Airbus A380 and Boeing 787, improved passenger experience and upgrading the check-in area. It doesn’t yet include plans for the second runway which will be finalised over the next five years and is expected to be a requirement by 2028.
Unlike owning an airline, Auckland Airport’s infrastructure benefits from passengers travelling on all of the airlines it services, which means it is highly leveraged to ongoing passenger growth as planes get larger and can travel further. Auckland is the main gateway to New Zealand, accounting for about three quarters of international passenger movements in the country. This is unlikely to be challenged given the lack of infrastructure elsewhere, and unlike Sydney where there are plans to build a second terminal, there are no such plans for Auckland.
With Auckland Airport’s 1500 ha of land, much of which is available for development into the likes of hotels, industrial hubs and eventually adding a second runway, there is plenty of capacity to grow. Despite Auckland Airport’s significant shareholder returns to date, the growth outlook should continue to serve the patient investor well.
The views expressed in this article are those of Hobson Wealth Partners Limited, an NZX Firm. The disclosure statement for Hobson Wealth is available free of charge by contacting us on 0800 742 737. This article contains class advice only and does not consider objectives or situation of any particular investor. It should not be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. We recommend that you consider the appropriateness of information to your situation and obtain financial, legal and taxation advice before making any financial investment decision.