GLOBAL REPORT—Two big industry players are sharing the spoils of a brightening hotel operating environment with their respective shareholders.
InterContinental Hotels Group and Choice Hotels International recently each announced vehicles meant to create value for shareholders. IHG is returning $1 billion to shareholders via a $500-million special dividend and a $500-million share buyback program that is scheduled to begin during the fourth quarter. IHG also upped its interim dividend by 31% to 21 cents per share, the third consecutive year the company has raised its dividend.
Choice, meanwhile, declared a special cash dividend of $10.41 per common share, or approximately $600 million. The company is funding the dividend with its recently completed $400-million notes issuance and through a senior secured credit facility.
Each company reported strong numbers during the quarter. Choice said it is driving “record traffic” to its hotels while IHG said global revenue per available room was up by 6.1% during the quarter.
Credit market ‘perfect storm’
Still, analysts in the past have questioned why a company would choose to use capital for measures such as these as opposed to investing in growth or paying down debt.
Choice CFO David White, responding to an analyst’s question of why a share buyback wasn’t part of the company’s plan, said the company’s special dividend is something that has been in the evaluation stage for several years. He said attractive rates in the capital markets were one factor that caused Choice to pull the trigger on the deal.
“So we view (the capital markets environment) as that may be around for another couple of months, but it’s not going to be around forever,” he said during the company’s second-quarter earnings conference call.
The decision to declare the dividend represented the company’s desire to create value with shareholders while taking advantage of a “perfect storm,” White said
“We’ve never seen a more positive environment to do that,” he said. “And that’s indicative of the rates that we are able to achieve and the fact that we gave up almost no flexibility whatsoever. So, we view those capital markets as sort of in a relatively unique scenario.”
In a research note, analyst Brian McGill of Janney Capital Markets said the firm will keep its “neutral” rating on Choice. Post-dividend, McGill said the firm expects Choice stock to trade in the range of $31 per share. The stock closed Thursday at $44.14 per share, and is up 16% year to date.
Returning capital to shareholders
When IHG’s transaction is complete, the company will have returned nearly $9 billion to shareholders since 2003.
“It’s an uncertain economic environment for everyone, but our industry’s outlook is rather favorable thanks to the current supply/demand dynamics,” IHG said in a statement to HotelNewsNow.com. “Our business model is resilient, as proven by our consistently strong performance, and we’re confident that we remain well-positioned.”
The company continued: “Our business generates significant free cash flows. Our priorities are then to invest those funds in strategic growth opportunities, while staying focused on returning cash and value to shareholders.”
In a note to clients, R.W. Baird & Company analyst David Loeb said he viewed IHG’s actions “favorably.” Given the expected proceeds of the company’s sale of the InterContinental Barclay in New York (for approximately $300 million) the special dividend is higher than R.W. Baird, which has an “outperform” rating on IHG, would have anticipated.
IHG’s stock closed Thursday at $26.05 per share, and is up 44.8% year to date.