You know the company, even if you don’t think you know the company. Choice Hotels International Inc (NYSE:CHH) is the hotel holding company behind the “badda book, badda boom” television commercials.
It’s clever and catchy, as any TV ad should be. Being clever doesn’t pay the bills, though, and it doesn’t necessarily keep the dividend spigot on for owners of CHH stock either. Can Choice Hotels stock continue to pay its dividend as religiously as it has for over a decade now?
Indeed it can. In fact, Choice Hotels may be one of the market’s best-kept secrets.
Firing on All Cylinders
If you’ve stayed at a Comfort Inn, Quality Inn, Sleep Inn, Cambria or Clarion, odds are reasonably good that you were staying at a Choice Hotels property. CHH stock operates more than 6,800 hotels all over the world, boasting more than 500,000 rooms under the parent company’s umbrella.
It’s not an easy business to be in — quite the opposite, actually. Companies such as LaSalle Hotel Properties (NYSE:LHO) and Host Hotels and Resorts Inc (NYSE:HST) have seen more than their fair share of trouble lately, despite a robust economy. LaSalle’s revenue per room fell 1.8% during the second half of last year after stripping out the impact of a couple of devastating hurricanes.
Host Hotels — which owns 87 properties including Marriott, Sheraton and Hyatt — has fallen short of estimates in two of its past three quarters. In two of those cases, earnings were actually down on a year-over-year basis despite a rising economic tide and more confident consumers.
It’s not easy to determine exactly why Choice Hotels has been able to create consistent revenue and earnings growth while other names in the business haven’t. Broadly speaking, though, in that all hotel operators have the same opportunity to attract travelers and are more or less working with the same information, it’s not a stretch to say that Choice Hotels’ management has the art of attracting and serving customers profitably down to an art and a science, and can deliver at “value” prices.
Even more impressive is that the value-oriented hotels like Comfort Inn or Quality Inn that make up the bulk of its portfolio are still marketable at a time when more consumers should theoretically be upgrading to higher-end options. Yet, the data is what it is. Last year’s revenue per available room (RevPAR) was up 2.5%, and average daily rates charged were 1.7%.
CHH expects equally impressive numbers for 2018.
Plenty of Cushion
So why, pray tell, have hotel companies like the aforementioned LHO and HST been able to draw more investor attention to themselves than CHH stock has?
In simplest terms, both offer dividend yields significantly better than Choice Hotels stock does right now. CHH stock is only paying out about 1.0% of its value in the form of dividends, while LaSalle Hotel Properties stock is paying 6.0%. Host Hotels currently sports a yield of 4.1%.
Those yields obscure important details, though, like the fact that Host can barely afford to pay its dividend from reported earnings, while LaSalle is cutting it uncomfortably close as well.
Choice Hotels, on the other hand, easily paid its trailing twelve-month dividend of 86 cents per share of CHH out of the $2.02 per share it earned during that period.
Fans and followers of LaSalle Properties or Host Hotels will counter that with real estate investment trusts (REITs), any per-share metric should be taken with a grain of salt. The nature of their structure can — and often does — mean the underlying value or success doesn’t readily show up on the books.
There’s a fair amount of truth to that statement, too. But Choice Hotels isn’t a REIT and it has plenty of wiggle room and cushion to keep paying its dividend without gaming its fiscal report.
Bottom Line for CHH Stock
No, while Choice Hotels is better fiscally rooted than other hotel stocks and REITs, that yield of 1.0% still isn’t a lot to write home about. You should know, however, that it’s been growing rather quickly as the organization’s management replicates the winning formula it has found at new locations. Ten years ago, the annualized dividend of 41 cents per share was only half of what it is now.
Point being, not only do you sometimes have to pay up for quality, sometimes you have wait for the value of quality rather than expect to see it all up front.
Editor’s note: An earlier version of this story mistakenly referred to Choice Hotels as a REIT.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.