Mexico’s Best Income Stock

Most people think competition is good, and it usually is — for consumers.

For established companies, however, the story is different. Companies that must face competition — which is very nearly all of them — must constantly worry about the quality of their goods or services, changes in consumer preferences, price, and a host of other factors.

Companies that have the rare benefit of being the only participant in their market, on the other hand, can just sit back and collect the cash. These companies are still aware of quality, price and consumer feedback, of course, but in the absence of any competitive threat the impetus to respond to those forces is far less pressing. The money rolls in regardless.

Investors can profit today from several companies that do just that.
One that stands out: Grupo Aeroportuario del Sureste (NYSE: ASR).

This company, whose name translates to “Airport Group of the Southeast,” operates nine airports in southeastern Mexico. With no competition in the region, the company has a legal monopoly on air traffic. Its business model is simple but elegant: A plane lands at one of its airports, it gets paid.

Investors need not fear any antitrust issues. The Mexican government is perfectly happy with the situation. In fact, Grupo Aeroportuario del Sureste is licensed by the Mexican government to operate its airports under a 50-year contract that runs from 1998 through 2048. For those of you keeping score at home, that leaves us with at least 39 more years of dividend payments.

ASR pays dividends once a year. The most recent payment, in May, was $4.6936 a share, which gives the shares a first-class 10.5% yield at today’s prices. The payment has grown +737.7% during the past five years, or about +53.0% if annually compounded.

Grupo Aeroportuario del Sureste not only makes money by charging fees to airlines, it also charges passengers for using its facilities. The more traffic that goes through its airports, the more money it makes. These airline and passenger fees account for about three-quarters of the company’s income. The rest comes from rent paid by retailers and parking-lot operators.
During the past three calendar years — through 2008 — revenue has increased +41.5%. For the first nine months of 2009, Grupo Aeroportuario del Sureste’s top line has amounted to -1% less than the comparable year-ago period. On the bottom line, net earnings nearly doubled from 2006 to 2008. So far this year, the company has earned a net profit equal to about 75% of what it made in the same period of 2008.

Natural disasters and government policies are among the risk factors that can affect results. International travelers make up about half of the company’s passenger traffic, and a hurricane can severely dampen tourist travel, as Hurricane Wilma did in 2005.

This year’s disaster was not a storm but swine flu. The subsequent government action took a toll on results. In June, safety concerns led the Mexican government to suspend air-traffic operations at one of Grupo Aeroportuario del Sureste’s airports, which represented 5% of the company’s passenger traffic. The government gave 60 days for the problem to be corrected, which dampened revenue.

Despite this, the company should benefit from steady, long-term growth in air traffic. The company is implementing a plan to upgrade its airports to handle more international traffic in the years ahead. The company has been busy investing in airport upgrades, including a new third terminal and a second runway at its Cancun facility, which was recently completed.

Grupo Aeroportuario del Sureste is perfectly positioned for stable cash flow and dividend payouts. With no debt, $3.09 in cash per share and no competition, the company should continue generating solid returns. Its 10.5% yield is a perfect way for investors to invest in a monopoly of their own.