I’m Selling Choice Hotels

I've had a nice run in Choice Hotels (NYSE: CHH  ) since my Special Situations portfolio purchased shares in August 2012. The investment saw gains of 41%, but I think it's time to move on. The primary reason? I have other great ideas that need cash, though I love Choice's focus on shareholders.

The special situation
The special situation at Choice was a dividend recapitalization. Last year management decided to issue a special dividend of $10.41 per share. The company borrowed money to do so, which ended up being a very savvy move. They doubled the size of Choice's balance sheet, and locked in debt that was near historical lows.

It was a fantastic decision, given Choice's business. The hotel franchisor requires very little capital expenditure to run its business and is highly cash generative. It could easily afford the increased interest expense of a dividend recapitalization, even if the business climate worsened.

Could there be another special dividend on the way?

There may well be. On the most recent conference call, management hinted that it was always looking for ways to increase shareholder value and suggested that a special dividend could be one way to do that. The balance sheet certainly looks strong enough to issue a dividend as large as last year's. And the company generates sufficient earnings to handle the interest expense, if the debt were priced around last year's bond offering.

So why am I selling? Well, the special dividend is not a gimmie. It may not happen. Last year there was time enough to get in after the payout was announced, so I may return if a special dividend materializes. Second, I have another great stock idea that needs money, and with Choice trading near the valuation of peers and at a relatively high level, I think there's more upside elsewhere.

Foolish bottom line
It's been a nice run with Choice, and best of luck to owners who continue to hold. With the shareholder focus of management, it's hard not to see the stock continuing to go up from here. But I think there are other better opportunities for my Special Situations portfolio. If you'd like to know what I'm buying next, join me on my discussion board or follow me on Twitter @TMFRoyal.

Interested in Choice Hotels or have another stock to share? Join me on my discussion board or follow me on Twitter @TMFRoyal.


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  • Report this Comment On December 13, 2013, at 11:07 AM, oldman144 wrote:

    I would agree with everything written. I would add in my own limited way, that I believe the business is over extended as in too many different franchises to watch. We try to stay at Choice hotels when traveling. Most are fine midline places to stay, but some are not up to standards set and this drags down the name. We stayed at an Econolodge and I could not believe that Choice approved that particular hotel. I looked up the reviews and most agreed it was a place to avoid.

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