Let People Pay You 9% to Run Away

The recession has been tough on companies that pay dividends. According to Standard and Poor’s, companies in the S&P 500 cut dividends -21% from 2008 levels. That’s the worst year for dividend cuts both on a dollar and percentage basis since 1938.

The recession took its toll on every industry, and airlines were no exception. Air passenger traffic posted the largest decline in aviation history, according to the International Civil Aviation Organization.

As if the recession and falling air traffic wasn’t enough, Mexico had to contend with the H1N1 outbreak, which would have halted traffic even during the best of times. Mexican aevlines and tourist destinations faced stiff headwinds in 2009 to say the least.

When a hurricane blows through, only the strongest buildings are left standing. And now that the financial tsunami has blown out, it’s clear that the travel-related companies left standing in Mexico are well managed, financially stable, resilient businesses.

Grupo Aeroportuario del Sureste (NYSE: ASR), whose name means “Airport Group of the Southeast,” is the exclusive operator of nine airports in Southeastern Mexico. The crown jewel of its airports is Cancun, the popular tourist destination, which accounts for more than 70% of the company’s revenue.

The company derives three-quarters of its revenue from fees that it charges every passenger that goes through its airports. And the 13 million to 14 million people who travel through ASR’s nine airports every year not only pay an automatic airport fee, they also rent cars, eat food, both of which generate concession revenue for the company.

Here’s the beautiful thing: Airports in Mexico have been operated by private companies since 1998. So ASR is essentially a government-regulated monopoly. There’s no competition. Anyone who flies into Southeastern Mexico must pay this company. And that will be true until 2048, when the existing contract between ASR and the Mexican government expires.

Interestingly, my colleagues at Market Advisor liked Grupo Aeroportuario del Pacifico (NYSE: PAC) for their list of “Top Ten Stocks for 2009” last year. Similar to how ASR dominates Southeastern Mexico, they pointed out that PAC profits from its “monopolistic stronghold” in the Pacific region, where it controls six of 10 of Mexico’s busiest airports. PAC gained +45% last year — a nice return for those Market Advisor readers. If you want their top 10 picks for this year, get them here for only $1.

Traffic at ASR’s nine airports has increased at an average rate of +5.6% per year between 1990 and 2006. Between 1999 and 2006, the company had compound annual earnings growth of about +10% per year. The stock has an average annual total return of +18.5% for the past five years — a far better return than the S&P 500, which went into the red in the same period.

ASR, like many foreign companies, pays a dividend once a year. The payout has increased every year since 2002, and this year’s dividend of $4.71 per share represented a +280% increase from the year before. ASR yields a compelling 8.6%.

That’s not to say the past year has been an easy one. For the first nine months of 2009, passenger traffic through the nine airports fell -14.3%. Traffic was lower for the two reasons I mentioned above: People cut back on vacations and the H1N1 outbreak. Yet, as ASR has a monopoly, it was able to raise prices to offset lower volumes.

Even so, passenger traffic dropped dramatically after the World Health Organization announced the outbreak of the H1N1 flu virus in Mexico in April 2009. Total year-over-year passenger traffic declined from just -2.1% in April — a drop likely attributable to the recession — to a much larger decrease because of swine-flu concerns: -50.7% in May, -28.4% in June. As fears of the virus abated, travel picked up and the decreases began to improve: -16.7% in July, -12.8% in August and -10.7% in September.

That being the case, it’s remarkable that revenue from passenger fees declined -3.5% and overall revenue fell -1.5%, to MXN$2.378 billion for the first nine months of 2009. Earnings before interest, taxes, depreciation and amortization, a number analysts use to gauge core profitability, fell only a little more than -2%, to MXN$1.521 billion, for the period. Despite the worst recession since the 1930s combined with an influenza outbreak, revenues fell less than -2%. That’s resiliency.

The company had to dig MXN$494 million into excess cash to pay for the massive dividend this year. But irsen after paying the dividend, the cash balance is still robust, at MXN$1.24 billion. In addition, ASR hasn’t paid a lower year-over-year dividend since 2002, and improving conditions in 2010 could lead to a higher dividend next year. In terms of financials, ASR has a strong balance sheet with very little debt: As of its Sept. 30 filing, ASR had MXN$604 million in debt with shareholder equity of MXN$13.7 billion.

Looking forward, the H1N1 scare has all but vanished and the U.S. economy appears to be improving, which should bode well for an increase in vacationers. ASR has also taken steps to grow earnings when economies improve by adding a third terminal and a second runway at Cancun. While another swine flu outbreak is always possible, things look promising.

The market seems to agree. The stock has rallied more than +40% since the end of October.

Given the bright future and dividend history, there’s no significant gain to be had trying to time the market. These shares look like a great buy for any dividend investor seeking a long-term hold today.