The UK’s leading blue-chip index, the FTSE 100 is full of income champions. However, there’s one dividend stock that’s usually overlooked by investors because its distributions tend to be somewhat lumpy.
The company I’m talking about is InterContinental Hotels Group (LSE: IHG), the owner of 5,273 hotels around the world with nearly three-quarters of a million rooms under management.
Over the past six years, efforts by management to cut costs and improve margins have seen its operating profit margin rising from 32% in 2012 to just under 40% for 2016. This growth has helped drive an increase in free cash flow per share from approximately 114p to 186p.
Cash-rich
The group is flush with cash and management is committed to returning these funds to investors. While the stock may only support a regular dividend yield of 1.8%, special payouts are frequent and last year, InterContinental returned a total of 180p per share to investors, a total yield of 3.7%. During 2016, 510p per share was paid out in special dividends. In aggregate, over the past five years, the company has paid out 1,102p per share in regular and special dividends to investors, that’s a yield of around 59% if you’d bought the shares at the beginning of 2013.
For 2017 and 2018, City analysts are expecting the firm to report earnings growth of 14% and 17% respectively, which should underpin further large cash distributions in the years ahead.
Copycat
Hostelworld (LSE: HSW) looks as if it’s trying to replicate InterContinental’s strategy. The company is opening hostels around the world, offering low-cost accommodation for whoever needs it.
Today, the group reported that for the year ended 31 December, overall bookings growth was 6% with bookings on its flagship Hostelworld brand up by 13%, with growth in the second half of 2017 at 6%.
City analysts are expecting the firm to report a pre-tax profit figure for the year of €16.8m, up from last year’s number of €0.2m. A full-year dividend of 13.7p is also projected giving a full-year yield of 3.7%. It seems as if management is committed to this payout as in today’s release, the firm noted that its “business model continued to generate excellent free cash flow resulting in a strong balance sheet at the year-end.” The pre-close trading update goes on to say “the Board looks forward to announcing the full-year final dividend in April.”
At the end of the first half, Hostelworld had a net cash balance of €18m giving it headroom to pay out a dividend to investors and spend for further growth.
Earnings growth supports dividend returns
As the firm continues to invest in its offering, and the business matures, I believe that like InterContinental, Hostelworld will adopt a policy of returning all excess cash to investors. Indeed, management seems to be prioritising dividends making a special note in the company’s half-year figures that “the group will have returned €32.1m to shareholders in dividends in the two years since the initial listing in November 2015.”
