Will shares in InterContinental Hotels Group PLC (LON:IHG) help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at InterContinental Hotels Group (LSE: IHG) (NYSE: IHG.US), which owns global hotel brands including Crowne Plaza, Holiday Inn and Staybridge Suites.
InterContinental Hotels Group vs. FTSE 100
Let's start with a look at how InterContinental Hotels has performed against the FTSE 100 over the last 10 years:
|Total Returns||2008||2009||2010||2011||2012||5 yr. trailing avg|
|InterContinental Hotels Group||-34.0%||63.8%||42.2%||-4.4%||49.8%||19.9%|
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
InterContinental Hotels was formerly part of a company called Six Continents, which had its roots in the Bass empire. In 2003, Six Continents split itself into two parts, InterContinental Hotels Group and pub chain Mitchell & Butlers, both of which gained new listings on the London Stock Exchange.
InterContinental's performance has been strong since then, and it has delivered total returns nearly four times greater than the FTSE 100 average over the last five years. The question for retirement investors is whether it can maintain this kind of performance.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how InterContinental Hotels shapes up:
|5 year average financials|
Here's how I've scored InterContinental Hotels Group on each of these criteria:
|Longevity||A mixture of old and new brands in a young organisation.||3/5|
|Performance vs. FTSE||Very strong.||5/5|
|Financial strength||High margins and good cash generation, but debt doubled last year.||4/5|
|EPS growth||Steady earnings growth.||4/5|
|Dividend growth||Well-covered, with steady growth but below-average yield.||4/5|
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 licences 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 proved very successful so far.
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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> Roland does not own shares in any of the companies mentioned in this article.