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Should You Buy InterContinental Hotels Group Today?

By Royston Wild – Apr 8, 2013 at 9:00PM

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How attractive are the shares of InterContinental Hotels Group?

LONDON -- I believe that shares in multinational hotel chain InterContinental Hotels Group (IHG -0.79%) (IHG -0.49%) should continue to head higher, as both earnings growth and shareholder cash returns are set to move skyward.

The stock has risen 13% so far in 2013, outpacing the rise across the FTSE 100, and Investec has placed a 2,100 pence price target on InterContinental Hotels, representing further chunky upside from current levels.

Firm looking to build on solid 2012
The company announced in February that revenues rose 4% in 2012 to $1.82 billion (1.19 billion pounds), in turn driving operating profit 10% higher to $614 million. Solid RevPAR growth, combined with the addition of new room capacity, helped to push fee revenues 6.8% higher from 2011.

Broker Liberum Capital expects adjusted diluted earnings per share to rise from 139 U.S. cents (91 pence) in 2012 to 157 cents this year, a 13% increase, before advancing a further 8% to 169 cents in the following 12-month period.

Intercontinental Hotels currently trades on a P/E rating of 18.5 and 17.2 for 2013 and 2014, respectively, which I believe offers decent value while its U.S. peers currently trade on a figure above 20.

Shareholder returns ready to ramp up
The hotel operator operates a progressive dividend policy that should see shareholder returns rise considerably. InterContinental Hotels hiked its dividend to 64 cents per share in 2012, a 16% increase from 55 cents the previous year.

And analysts expect this to continue to rise in the coming years -- a payout of 69.8 cents has been penciled in by Liberum for 2013 before hitting 75.1 cents in 2014.

Although projected payments offer a yield below the FTSE 100 average of 3.2%, with readouts of 2.4% and 2.6% anticipated for this year and next, I expect the company to steadily build this above the index average in the coming years. The dividend is also well protected, with anticipated coverage of around 2.2 times for the next two years above the widely regarded safety watermark of  2.

In addition, InterContinental Hotels plans to keep returning cash to shareholders through ongoing asset disposals -- the company has sold 191 hotels since 2003, generating more than $6.1 billion in the process.

The firm announced last month that it had divested its Intercontinental Park Lane hotel for $457 million, exceeding December's net book value by 62%, with the group securing a 60-year management contract for the asset as part of the deal.

Both the value and timing of the deal has exceeded analyst expectations and increases the likelihood of further chunky shareholder cash returns this year. And InterContinental Hotels still has three other sizable hotels tipped for disposal over the next few years that should return even more cash -- Investec thinks that a further $1 billion is likely to be shifted back to shareholders over the next year.

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Royston Wild does not own shares in InterContinental Hotels Group, and neither does The Motley Fool. We Fools may not 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.

Stocks Mentioned

InterContinental Hotels Group Stock Quote
InterContinental Hotels Group
$59.41 (-0.49%) $0.29
InterContinental Hotels Group Stock Quote
InterContinental Hotels Group
$4,782.00 (-0.79%) $-38.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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