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Why Choice Hotels International Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shareholders of hotel franchiser Choice Hotels International (NYSE: CHH  ) can sleep a little easier tonight after their stock popped as much as 10.5% following the announcement of a special dividend and an analyst upgrade.

So what: Following the market close yesterday, the franchiser of Comfort Suites, Extended Stay, and Econo Lodge announced plans to use an existing senior credit facility and $400 million worth of unsecured notes to fund a special dividend and for general corporate purposes. Although the company didn't cite a specific figure, the special dividend would work out to about $10 per share. In response to this news, R.W. Baird upgraded Choice to neutral from underperform, while credit ratings agency Standard & Poor's lowered its rating on the company by one notch to BB+.

Now what: Today's move might seem like a near-term bullish outcome for shareholders, but the use of an existing credit facility and $400 million in debt to fund a payout to shareholders is, well, downright scary (in my opinion). The move more than doubles Choice Hotels' existing debt and could put the company in bad shape if consumer spending shifts away from leisure travel. If I were a shareholder, I would use today's announcement as my sign to exit, stage left.

Craving more input? Start by adding Choice Hotels International to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/21/2016 4:02 PM
CHH $45.35 Up +0.30 +0.67%
Choice Hotels Inte… CAPS Rating: No stars