InterContinental Hotels’ score of 20/25 suggests that it could be a strong candidate for a retirement portfolio, and I think this is a fair assessment. The group generates a lot of cash, thanks to its asset-light business model — 3,934 of its 4,602 hotels are franchised, meaning that InterContinental simply licenses the brand to third-party management, who own and operate the hotel, paying a percentage of room revenue to InterContinental for their use of its brands.
Of the group’s remaining hotels, 658 are managed — where InterContinental provides management staff but does not own the hotel — and just 10 are actually owned by the company. This business model takes full advantage of the power of global brands such as Holiday Inn, but removes the risks and overheads of managing staff and real estate in many different countries. It’s a business model that has proven very successful so far.
My verdict
InterContinental’s business model and bargaining power means that it generates a lot of cash, and has quite low levels of capital expenditure. In turn, this means that its dividends are usually covered around twice by free cash flow, making them very safe, and providing plenty of headroom for future increases.
The downside of this is that the company’s dividend policy is relatively cautious and provides a below-average yield. InterContinental’s forward yield for 2013 is currently 2.4%, well below the FTSE 100 average of 3.1%. If you’re not planning to retire for some years yet, it might be worth accepting this lower yield now to lock in future gains and income, although with the company’s shares at all-time highs, a cheaper buying opportunity may come along, if you can afford to wait.
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The article Is InterContinental Hotels Group the Ultimate Retirement Share? originally appeared on Fool.com and is written by Roland Head.
Roland Head does not own shares in any of the companies mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.
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