Should I Invest In InterContinental Hotels Group Plc?

To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at InterContinental Hotels Group (LSE: IHG) (NYSE: IHG.US), the international hotel company.

With the shares at 1,898p, the company’s market cap. is £4,977 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue ($m) 1,897 1,538 1,628 1,768 1,835
Net cash from operations ($m) 641 432 462 479 472
Adjusted earnings per share (cents) 120.9 102.8 98.6 130.4 141.5
Dividend per share (cents) 41.4 41.4 48 55 64

You only have to look at InterContinental’s 2008 share price of around 500p and compare it to today’s, roughly, 1900p to realise that, from an investing point of view, we are dealing with a cyclical company here. That cyclicality shows mostly in the earnings and cash-flow figures in the table, with revenue remaining broadly flat over the period.

But cyclicality isn’t the whole story. I reckon we are also dealing with an interesting growth proposition that comes in the form of a focused and innovative hospitality company with a record of efficient business execution. You’ve probably come across some of the company’s brands such as Crown Plaza and Holiday Inn.

Indeed, the business model is, perhaps, unexpected: the firm owns only around one percent of the hotels it operates, which means the company is asset light. Most of the hotels operate under a franchise agreement, or InterContinental manages them on behalf of owners. That must enable more flexibility to help the firm manage its way through economic cycles without the encumbrance of property ownership.

Last year, around 50% of revenue came from the Americas, 30% from Europe, 12% from Asia, the Middle East and Africa, and 13% from China. So the firm is growing in some interesting potentially fast-growing markets, but the valuation makes me nervous about investor total returns from here.

InterContinental Hotels Group’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: adjusted earnings covered last year’s dividend around 2.2 times.  4/5

2. Borrowings: net debt is running at around 1.3 times the level of operating profit.  4/5        

3. Growth: flat-looking cash flow provides some support to growing revenue and earnings. 3/5

4. Price to earnings: a forward 18 or so looks ahead of earnings and yield expectations.  1/5

5. Outlook: good recent trading and a positive outlook.  5/5

Overall, I score the firm 17 out of 25, which inclines me to be cautious about the firm’s potential to out-pace the wider market’s total return, going forward.

Foolish Summary

Although borrowings seem under control and earnings cover the dividend well, cash-flow growth and the P/E ratio are reasons to be cautious. The outlook is encouraging.

However, InterContinental’s forward dividend yield at this share-price level is only about 2.6%, so I’m considering some other stalwarts for my portfolio like the gems revealed in this report, prepared by our top analysts, that highlights five shares with seemingly impregnable, moat-like financial characteristics. “5 Shares To Retire On”, presents five shares that I’d be happy to commit funds to in order to build wealth in the long run.

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 > Kevin does not own shares in InterContinental Hotels Group.