Lodging Is Off Defense

 | Nov 05, 2013 | 3:30 PM EST
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In an October 2011 column, I discussed defensive investing and grocery stores and the economy segment of the lodging industry. Although I've written since then about grocery stores, I had not come back to the lodging sector until now.

The two companies I originally discussed were Choice Hotels International (CHH), and InterContinental Hotels Group (IHG). In the two years since that original recommendation, the price of CHH has increased by about 50%, moving from about $30 to about $46. Meanwhile, IHG has increased about 75%, from about $16.50 to just shy of $29 today.

These returns do not include dividend distributions. The dividend expressed as a percentage of the stock price has declined as a result of the stock price appreciation and warrants concern at current levels.

Two years ago, the dividend yield was about 2.5% for CHH and 1.9% for IHG. Today they are both at about 1.6%. At a full percent below the current 10-year Treasury yield, investors should be cautious about any further upside for the stocks in the near term. When I wrote the original column, the dividend yield of both companies was above the 10-year Treasury yield; their stock prices declined by about 30% that year.

Although the appreciation and dividends have been excellent the majority of the earnings for these companies and the segment more broadly has come from the ability to reduce debt carry costs by way of refinancing mortgages. That process has now largely been completed and investors should not expect any further boost to bottom line earnings from any more debt restructuring.

Any more upside to the stocks of companies in the economy and mid-level lodging space will have to come from increased economic activity that causes top-line revenue to increase, and I do not think that is likely. Private sector economic activity continues to be anemic even though it has been five years since the Fed lowered the fed funds rate to 0-25 basis points.

The rest of the sector is exhibiting the same issues. Marriott (MAR) has increased about 71% during the same time frame and now has a dividend yield of just 1.5%. Wyndham Worldwide (WYN) has increased about 120%, from about $30 to $$67 and now has a dividend of just 1.7%. Starwood Hotels & Resorts (HOT) has the highest dividend of the group at 1.8%, while its stock price has increased about 80% from $41 to $74. Hyatt Hotels (H) has increased about 33%, even though it doesn't pay a dividend.

I originally included CHH and IHG in the defensive investing column because they are in the economy segment and typically perform much better than the more upscale lodging companies during recessions or slow economies. Their performance over the past few years though and the reductions in their dividend yields caused by their stock price appreciation warrants that they no longer be considered defensive positions. From this point, anyone holding them, or the rest of the stocks in the lodging space, for appreciation, is speculating on an increase in revenue that must most logically come from an increase in private sector economic activity. I don't see that on the horizon.

As income vehicles, there are plenty of other segments that offer greater returns. As I wrote about last week, the oil companies all have much higher dividend yields, all of which are greater than the 10-year Treasury yield. 

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