I’d buy 819 shares in this magnificent FTSE 100 company for a £1,000 second income

Despite a patchy record and a low dividend yield, Stephen Wright thinks income investors should consider buying shares in InterContinental Hotels Group.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A Black father and daughter having breakfast at hotel restaurant

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in InterConintental Hotels Group (LSE:IHG) aren’t an obvious choice for income investors. A 1.6% dividend yield and an inconsistent record don’t exactly jump off the page.

I think this is a missed opportunity. The FTSE 100 isn’t exactly short of quality dividend stocks, but I think InterContinental Hotels Group might be as good as any.

Dividends

InterContinental Hotels isn’t a Dividend Aristocrat and it won’t be one for a long time. The company has lowered its dividend five times in the last 20 years, most recently in 2020. 

Should you invest £1,000 in Intercontinental Hotels Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Intercontinental Hotels Group Plc made the list?

See the 6 stocks

Despite a patchy recent history, there are a few things investors should note. The first is that the company actually has a very good record over the long term. 

InterContinental Hotels Group dividend per share 2004-24


Created at TradingView

Investors who bought the stock in 2004 and stayed the course to the present day have gone from receiving 42p per share to £1.23. That’s an average annual increase of 5.5%.

Furthermore, the company’s rebounded strongly from the Covid-19 pandemic and its dividend’s currently at record levels. And there’s reason to think it might stay there.

InterContinental Hotels Group shares outstanding 2004-24


Created at TradingView

The company’s been steadily reducing its share count using share buybacks. As a result, there are fewer InterContinental shares outstanding than at any point in the last 20 years.

Put simply, fewer shares overall means more of the total cash distributed by the business for each shareholder. So a record low share count makes the dividend much easier to maintain.

A magnificent company

InterContinental’s impressive dividend growth’s been due to the strength of the underlying business. And the key to this is the company’s franchise model.

The firm doesn’t own the hotels in its network. Instead, it provides marketing, booking and technology support in exchange for a fixed fee and a percentage of the hotel’s revenues.

This means InterContinental avoids virtually all of the costs associated with running hotels. These include maintaining buildings, employing staff and paying energy bills.

As a result, the company’s extremely efficient at generating cash. This shows up in its free cash flow margin, which is consistently higher than the likes of BP, Tesco, and Unilever.

InterContinental Hotels Group free cash flow margin 2004-24


Created at TradingView

The stock trades at a price-to-earnings (P/E) ratio of 24, which is expensive with interest rates at 5.25%. This is a risk and investors need to consider whether or not it’s worth it.

I think it is. I expect the company’s cash-generating ability to allow it to keep bringing down its share count and increasing its profits – as it’s done for the past two decades. 

That second income

A £1,000 second income from InterContinental Hotels Group would require 819 shares. That would cost £68,000, which is beyond me right now but might be achievable with time.

Investing £1,000 a month would bring me to this level in around five years. And I could reinvest the dividends I receive along the way to get me to this target more quickly. 

InterContinental Hotels Group shares are expensive. But the bottom line is that I’d rather own a small amount of an exceptional business than a larger share of an ordinary one.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Unilever Plc. The Motley Fool UK has recommended InterContinental Hotels Group Plc, Tesco Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »