I think you would be hard pressed to find a company in the FTSE 100 that has a better record of returning cash to investors than InterContinental Hotels Group (LSE: IHG).
In the last three years alone, this company has issued special dividends worth 799p, excluding the regular distribution, which last year amounted to 87.7p. In total, the firm distributed 291.7p per share to investors in 2018 for a total yield of 6.1%.
Going back to the beginning of 2009, shares in IHG have produced a total return for investors of 23.6% per annum, turning every £1,000 invested a decade ago into £9,300. And I think there is an excellent chance that the company will continue to reward its investors with special dividends for the foreseeable future.
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Asset light
Over the past few years, IHG has transformed its business by selling owned properties to franchisees. The results of these efforts is that the company has become highly cash generative, as it no longer needs to spend hundreds of millions of dollars every year opening, renovating and maintaining properties. Free cash flow has exploded as a result. Last year it generated free cash flow from operations of $508m, most of which was returned to investors.
According to its latest trading update, last year the company saw the highest level of “signings“, deals signed to open new rooms, in a decade with the number of agreements up 18% year-on-year. This bodes well for IHG’s future growth and dividend potential. Revenue per room increased 2.5% in 2018, and total group gross revenue rose 6.6% off the back of a 4.8% increase in the number of franchised and owned rooms across the business.
Analysts believe IHG’s earnings per share will increase 13% in 2019 and 7.7% in 2020, which, in my opinion, means investors are more than likely to see further substantial special dividends in the years ahead.
Turn around complete
Supermarket retailer Morrisons (LSE: MRW) has recently taken a leaf out of IHG’s book by announcing a special dividend following a robust trading performance in 2018. The group’s underlying profit before tax rose 8.6% in 2019, prompting management to declare a final dividend of 4.75p and a special dividend of 4p, which takes the total dividend to 12.6p — up 25% year-on-year. Including the special and regular dividend, I calculate investors buying the shares today will pocket a dividend yield of 5.5%.
Morrisons has a history of paying out special dividends alongside regular distributions when the going is good, and I expect plenty more from the group over the next few years.
Efforts by management to reduce debt has left it with a relatively clean balance sheet (net debt to equity of 22% at the end of 2018) and last year, the company generated £265m in free cash flow from operations, all of which was returned to investors.
Improving profit margins and the continued rollout of its wholesale supply deal, which is expected to produce revenues of nearly £1bn per annum for the retailer, should help Morrisons achieve earnings growth of 34% during the next two years according to the City. A similar increase in free cash flow could, in my opinion, mean further special dividends for investors are on the horizon.
All in all, now the company’s recovery is complete I think it is worth buying shares in Morrisons for its income potential.
