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Is Wyndham Hotels Stock a Buy?

By Lawrence Rothman, CFA - Feb 19, 2021 at 11:30AM

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Should you take the brave step of investing in a hotel company while the pandemic is still going on?

The lodging industry was one of the most severely affected by the COVID-19 pandemic last year, and that continued in 2021. Despite that turmoil, Wyndham Hotels & Resorts' (WH 0.94%) stock managed a 3% gain over the last 12 months, outperforming the S&P 500 Hotels, Restaurants, and Leisure's essentially unchanged performance.

Are the shares poised to continue outpacing the sector? It's time to peek inside the door to determine whether you should invest in Wyndham.

A child running and smiling into a hotel room while her mother and father are watching her in the next room.

Image source: Getty Images.

Less expensive lodgings

Wyndham primarily franchises its properties, receiving a percentage of the room revenue, limiting its exposure to rising hotel operating costs and major capital expenditures. Its lodgings are tilted toward the lower-priced economy and midscale categories, with the two accounting for 78% of its rooms. These are brands like Super 8, Days Inn, Howard Johnson, La Quinta, and Ramada.

Additionally, most of its customers, 70%, are leisure travelers. Out of the remaining portion, the overwhelming majority are small businesses such as contractors, truckers, and emergency crew workers, and not big corporate clients.

These tend to do better than higher-priced hotels during difficult economic days. Indeed, management stated that its economy and midscale properties outperformed higher-end hotels across the industry.

Wyndham isn't immune from the pandemic, of course. In the fourth quarter, revenue fell by 40% to $296 million.

While business travel may not fully recover for some time, if at all, as companies continue with virtual meetings, people will go back to taking vacations. No one knows when this will happen, but governments and companies are distributing coronavirus vaccines at a quicker pace, hopefully making increased travel a reality soon. When that happens, Wyndham, with its affordable options, is in a good position to benefit.

Dividends back on the upswing

Last year, Wyndham's board of directors slashed the quarterly dividend by 75% to $0.08. Although painful for shareholders, this was understandable as COVID-19 spread, causing governments to issue stay-at-home orders and travel restrictions.

On the bright side, Wyndham continued to pay dividends, even at a diminished rate, while others in the industry, including Hilton Hotels and Marriott International, completely suspended their dividends. These larger hotel chains have yet to restore their payments.

Better still, unlike the others, Wyndham saw fit to increase its payout, recently doubling it to $0.16. It is a bold step when there is so much uncertainty. Indeed, other companies across industries are in danger of cutting their payments. But Wyndham's board of directors wouldn't enact a raise unless it had confidence in the future and its ability to sustain the new rate.

Stay or go?

It is always unnerving to invest in a company whose results fluctuate with the economy, particularly when it is going through challenging times. However, Wyndham's hotels appeal to more budget-conscious travelers that are looking for affordable vacation options. On top of that, you can collect your dividend payments while waiting for the stock to rise. For patient investors willing to take some risk that personal travel will soon pick up, this is a good opportunity to pick up some Wyndham shares.

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Stocks Mentioned

Wyndham Hotels & Resorts, Inc. Stock Quote
Wyndham Hotels & Resorts, Inc.
$75.32 (0.94%) $0.70

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