Thomas Cook‘s (LSE: TCG) recovery over the past five years has been impressive. After flirting with bankruptcy in 2012, the shares have risen 600% since. This year the company is expected to report a pre-tax profit of £196m, up 376% year-on-year and a complete reversal from the £367m loss reported for 2012.
So it looks as if the recovery is nearing completion and management now seems to be preparing for the next stage, growth.
Significant partnership
Today, the group announced that it had entered into a strategic alliance with Expedia, Inc., one of the world’s leading travel companies. Under the agreement, Expedia will become the preferred provider of hotels for Thomas Cook’s complementary city and domestic holiday business. Overall, this deal will provide Thomas Cook customers with over 60,000 more hotels than the company currently offers. And as well as increasing its offering to customers, the agreement will also allow the company to “reduce the cost and complexity of its city breaks and hotel-only business.”
I believe that this is an enormous, game-changing opportunity for the group. Higher margins and a larger product range with little to no upfront investment, what’s not to like?
Dividend growth on the cards
As of yet, City analysts have not adjusted their earnings forecasts to reflect this deal, but they’ve already pencilled in earnings per share growth of 16% for the fiscal year ending 30 Septemeber 2017. Management is also expected to announce a 60% uplift in the dividend payout to 0.8p per share. Next year, the payout is projected to rise 125% to 1.8p, and I think this will be just the start of a series of payout hikes.
At present, the dividend is covered 17 times by earnings per share. If management reduces cover to around three times, more in line with the market average, the payout will rise to 3.3p, giving a dividend yield of 2.7% at current prices. This payout is below the market average, but with payout cover of three times, it would be one of the most secure dividends out there.
Cash is king
IWG (LSE: IWG), the flexible workspace provider formerly known as Regus, has seen demand for its services explode over the past two years, and analysts are expecting this trend to continue. The City believes the company can earn 21.3p per share for 2018, up 90% from the figure of 11.2p reported for 2015.
The great thing about IWG’s business is that it’s highly cash generative. Last year the company generated £433m in cash from operations, spent £319m on expansion and returned £79m to investors, approximately 8.3p per share. With net debt of only £201m at the end of 2016, there’s plenty of room for the business to ramp up cash returns to investors if management decides to dial back growth.
At the time of writing, shares in IWG support a dividend yield of 1.9%, which isn’t that exciting. Nonetheless, with its cash-rich business model, I believe patient investors will be well rewarded with higher distributions in future as the company switches from growth to consolidation.
