Intercontinental Hotels Group (LSE: IHG) is a leading hotel chain, so it’s no surprise that it’s had an up and down year.
In the first quarter of calendar 2020, the shares fell as business and leisure travel plunged due to the pandemic. With all the uncertainty, Intercontinental Hotels’ management cancelled its fiscal year 2019 final dividend. The board also decided not to pay the interim dividend for 2020.
Beginning in late March however, the shares began to slowly rebound as governments around the world unleashed fiscal and monetary stimulus measures. And despite the rises meaning its valuation was no longer at bargain levels, Intercontinental Hotels stock continued to rally in November. This was thanks to better than expected Covid-19 vaccine news.
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Given the stock rally and the approval of vaccines, what’s ahead for Intercontinental Hotels’ dividend? Here’s what I think.
Intercontinental Hotels: dividend history
Before the pandemic, Intercontinental Hotels was on course for a very respectable five-year history of dividend payouts.
From 2015 to 2018, management increased the annual dividend every year. The company’s total normal annual dividend per share rose from $0.85 for 2015 to $1.144 for 2018. If it hadn’t been for the pandemic, IHG’s full-year dividend would have increased to $1.258 for fiscal 2019 too.
Even better, management showed a willingness to return even more capital to shareholders through special dividends. In July 2014, the company paid a special dividend of $750m. This was followed up with special dividends of $1.5bn in May 2016, $400m in May 2017, and $500m in January 2019.
Where I think the dividend is headed
Unfortunately, as mentioned, the pandemic meant Intercontinental Hotels has axed its 2019 and 2020 dividends.
But I think it’s only a matter of time before IHG resumes its payouts. The company’s current official position is that “the board will continue to defer consideration of further dividends until visibility of the pace and scale of market recovery has improved.”
Given that IHG’s financials are improving and the company has adequate liquidity, I believe it can pay a dividend next year if it wants to. Its Greater China operations in particular have shown signs of a fast rebound.
Using the intended payout ratio of 41.5% in 2019 (the company reported adjusted earnings per share of $3.033 and intended to pay a normal dividend per share of $1.258), I reckon it could pay $0.56 in annual normal dividends per share next year. This assumes it achieves the average analyst estimate of $1.36 in EPS for fiscal 2021.
With all the uncertainty left, however, I believe that management will be conservative. That means it should initially pay a smaller amount than that.
As business normalises and if EPS grows longer term, the dividend could eventually surpass its pre-Covid-19 levels, given its past history.
As for what I’d do, I like Intercontinental Hotels, but given the company’s current valuation, I wouldn’t buy just yet. Instead, I’ll add the share to my watch list and buy if the price dips substantially lower. As the recovery continues, that means I may have missed the boat. But I’m not worried as I see many other opportunities in the FTSE 100.
