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IHG - 11% dividend increase

Nicholas Hyett | 21 February 2017 | A A A
IHG - 11% dividend increase

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InterContinental Hotels Ord 18 318/329p

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Underlying revenues increased 4.6% at IHG, with operating profits up 9.5% to $702m. The full year ordinary dividend increases 11% to $0.94 per share, with an additional $400m special dividend.

The shares rose 0.8% in early trading.

Our View

InterContinental Hotels Group (IHG) is now a pure-play hotel management and franchising company, operating brands ranging from InterContinental at the top end of the market to Holiday Inn Express in the budget hotel sector.

In managed hotels, IHG runs the show on behalf of landlords who own the properties. For franchises, IHG is essentially licencing a brand to the hotel owner and directing reservations to the property from their worldwide online bookings system. In both cases, IHG is collecting revenues from the hotels, in one form or another, without tying up capital by actually owning the properties.

The transition away from owning hotels has meant that plenty of cash has come into the kitty as the bricks and mortar hotel buildings have been sold off over the last 10 years. Unlike others in the industry, IHG has not got involved in large-scale acquisitions or consolidation, and has instead used the extra cash to pay out special dividends to shareholders. The group has now returned $12.8bn to shareholders since 2003.

That process is now largely at an end, with the group holding just $419m of property assets. The focus now be firmly on the cash generation potential of the managed and franchised businesses, supporting the ordinary dividend.

Recent quarters have seen growth in revenue per available room (RevPAR) slow, largely as a result of poor performance in oil heavy regions to which IHG is heavily exposed. However, the group has a significant pipeline of new hotel rooms which should support revenue growth even if RevPAR slows. Roll-out of new rooms is stepping up in China, and the existing presence in the US market should give them a strong presence in two attractive markets.

Despite near term headwinds, we feel that the group's potential to generate cash through its capital-light approach should provide some reassurance that the company can maintain its strong track record on the dividend. IHG has either raised or maintained the ordinary dividend every year since 2004, and analysts are currently forecasting a prospective yield of around 2.2%.

Full year results

IHG saw global revenue per available room (RevPAR) increase 1.8% in 2016, driven by a 1.2% increase in prices and record occupancy levels. The number of rooms in the system increased 3.1%, equating to around 40,000 new rooms.

Profits in the Americas, the largest contributor to group profit, increased almost 8% on an underlying basis. Like-for-like (LFL) RevPAR rose 2.1%, driven by a 2% increase in pricing. The division opened 24,000 hotel rooms in the year, its highest level of openings in 5 years, and closed 15,000.

Greater China delivered LFL RevPAR growth of 2.2%, driven by a strong performance in Mainland China which more than offset declines in Hong Kong and Macau. Underlying profits increased 15%, although the strong dollar held back reported numbers. 8,000 rooms were opened in the period.

The European and AMEA regions delivered underlying profit growth that was flat and down 4% respectively. The group opened 4,000 rooms in each market.

IHG signed 76,000 rooms into its pipeline over the course of the year, representing over 500 new hotels and the highest number of deals signed since 2008. The group's pipeline now stands at 230,000 rooms, of which 45% are under construction and 90% are in the group's top 10 priority markets.

Free cash flow increased 39% year-on-year to $646m. Capital expenditure in 2016 hit $241m, with the group continuing to expect gross capex in the region of $350m a year going forwards.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.