Marriott International's (MAR 2.29%) share price took off in November following positive news on the coronavirus vaccine front. The good news continued: State and federal government agencies, along with pharmaceutical companies, have begun distributing approved vaccines, while provider networks are administering the shots.
However, while everyone hopes for a return to normalcy, is investor optimism in Marriott warranted right now?
When will guests return?
Marriott maintains 30 hotel brands, including those at the select level (e.g., Courtyard, Residence Inn, and Fairfield); premium (e.g., Marriott, Sheraton, and Westin); and luxury (e.g., JW Marriott, Ritz-Carlton, and W Hotels).
It operates nearly 99% of these properties under management and franchise agreements. Under this asset-light approach, Marriott earns fees based on the property's revenue. Under its management contract, it also has the opportunity to earn incentive fees that are a percentage of the profit.
While this arrangement means Marriott doesn't pay the property's operating expenses or capital expenditures, the company does rely on the property to attract guests and generate revenue. With the advent of COVID-19, this has become very challenging. Marriott's third-quarter revenue dropped by 57% to $2.3 billion. Worldwide, its occupancy was about 35%, down about 41 percentage points compared to a year ago.
With medical professionals administering vaccines, there is hope that people will soon start traveling again. However, that is far from certain. The rollout has been slow, and it will take a while to obtain mass immunity. Additionally, it is unclear how much business travel will return given the growing popularity of remote meetings and the benefits they provide, such as saving companies money.
The economic recovery remains a wildcard
Then there is the toll the pandemic is taking on the worldwide economy. For instance, job losses in several countries have begun to tick up again along with a resurgence in COVID-19 cases. With Marriott's earnings dependent on business and individual travel, the company is economically vulnerable.
Right now, the economy is weak, which will likely depress travel for some time. While everyone hopes businesses and jobs recover quickly, no one knows when that will happen.
Last year, Marriott suspended its quarterly dividend payments. This was a prudent decision after the virus wreaked havoc on people's health and the economy, crushing the company's results.
But it does mean that shareholders can't rely on the regular payouts while waiting for results to improve. Nor is it likely that Marriott is going to reinstate dividends anytime soon. Regarding dividends and share repurchases, Marriott CFO Leeny Oberg stated the following on the third-quarter earnings call:
I think for the moment that's still a little ways off. This will obviously depend on how quick [revenue per available room comes] back, and we've got, as you know, we've got leverage ratios that we want to get back in line, certainly on our revolver covenant to even consider share repurchase and dividends we need to get back to four times to be able to even consider that.
Marriott, with its well-recognized brands, will undoubtedly bounce back eventually. However, with a lack of dividends to provide income, I would hold off purchasing the shares until you see signs that the pandemic is past us and the economy is on the upswing.