Check in at InterContinental

04/14/2016 7:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

When growth slows, you should stay away from travel-related stocks, or so says an investing axiom. But you couldn’t prove now that with travel stocks, explains Benjamin Shepherd, editor of Global Income Edge.

While many are looking at airline stock recommendations, I think the real money to be made is when all those travelers reach their destinations.

Compared to airlines, hoteliers have much better control over their cash flow, especially if they enjoy serious economies of scale.

InterContinental Hotels Group (IHG) has roughly 744,000 rooms in more than 5,000 hotels spread across 100 countries. In addition to the InterContinental name, its its brands include Holiday Inn, Crowne Plaza and Staybridge.

Its growing Kimpton and Hotel Indigo brands are probably better known to millennials, as well as its EVEN Hotels, which cater to the health-and-wellness set with health food restaurants and an in-room gym.

Roughly three-quarters of InterContinental Groups rooms are operated under franchise agreements and just over a quarter of those are under management contracts with the group.

That makes the hospitality group extremely “asset lite,” in that it doesn’t actually own most of the properties it collects revenue from.

These arrangements generate extraordinarily high returns on capital, typically in excess of 25%, while the company’s net income margin has averaged better than 30% over the past five years.

Earnings have also grown well in excess of revenue and that growth has been a boon for income investors who have realized 9.8% dividend growth over the past five years.

The stock currently offers a 3.5% yield. It also declared a $1.5 billion special dividend in a show of strength in what many still perceive as a shaky economy.

We believe InterContinental can keep growing. At the same time, the hotelier continues to expand those brands that cater more to millennial travelers. Add all of that up and we expect strong dividend growth for years to come.

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By Benjamin Shepherd, Editor of Global Income Edge

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