If you’re looking for a FTSE 100 income stock to add to your portfolio, I highly recommend taking a closer look at InterContinental Hotels (LSE: IHG).
At first glance, this company doesn’t look like much of an income champion. Indeed, it supports a dividend yield of just 2.1% at the time of writing. However, InterContinental is what I like to call a ‘hidden dividend’ stock.
A hidden income investment
InterContinental only offers investors a token regular dividend, but when times are good, management issues big special dividends. This approach allows the company to manage its cash flows better because management hasn’t committed the group to a substantial regular dividend payout.
For example, over the past six years, the firm’s regular dividend has grown at a compound annual rate of 2.7%. That’s hardly market-beating stuff.
Nevertheless, when we include special dividends, InterContinental’s dividend track record improves dramatically.
Special dividends
Last year, it paid investors a total of $3.76 per share in dividends, which works out as £2.87 at current exchange rates, giving a dividend yield of 5.9% on the company’s current stock price. This total payout was a combination of regular and special dividends. These payouts are not reflected in City analysts’ forecasts due to the uncertain nature of special payouts.
2018’s payout wasn’t a one-off either. In 2017 the group declared a special dividend of 156.4p per share on top of its regular payout. In 2016, InterContinental also paid a special dividend of 438.2p per share and, in 2014, a special interim dividend amounted to 174.9p.
Including these special distributions, over the past decade, an investment in InterContinental has returned 18.2% per annum. That’s enough to turn every £1,000 back in 2009 into £6,100 today.
Growth continues
So, is this trend set to continue? I think it will. Over the past five years, InterContinental’s earnings per share have grown at a compound annual rate of 5% as the group has boosted its room portfolio. Further growth is planned.
According to a trading update published by the group in October, InterContinental’s estate increased in size by 4.7% during the first half of 2019 to a total of 865,000 rooms across more than 5,700 hotels.
Management has focused on growing out the group’s new Atwell Suites brand, and the luxury Six Senses resorts brand it acquired this year, as part of a shift upmarket.
InterContinental has also benefited from its asset-light business model. Rather than owning the hotels in its portfolio, the company uses a franchise model whereby it collects an income from hotel owners and managers without taking any property risk itself.
That’s why the group can return so much cash to investors. Its investment requirements are relatively low compared to other businesses as the hotel owners are responsible for the majority of costs.
The bottom line
So overall, considering InterContinental’s track record of returning cash to investors, as well as the company’s asset-light business model, I think this hidden FTSE 100 dividend stock could be a great addition to your portfolio today.