Top 3 Hotel Stocks to Stay in Your Portfolio

The four-week average jobless claims are at the lowest levels we’ve seen since the start of the Great Recession in 2007.
More jobs will translate into higher discretionary income.
What better way to spend that money than on a getaway. We’re nearly two-thirds through the second most popular month of the year for vacations, behind only July, but we still have the fourth most popular month to go, September.
This vacation season could be one of the best in years. Question is: Which industry will be one of the biggest benefactors of these solid vacation numbers?
When individuals and families decide to take a vacation they don’t always fly, but they almost always stay in a hotel.
But the really great news about owning hotel stocks is that they will also get a boost from increased business travel.
The increase in employment that we’re seeing means more companies are hiring, suggesting they are more bullish on the economic environment. The Global Business Travel Association notes that spending on business trips should rise nearly 7% this year, versus 2013. And where do these business travelers stay? Hotels.
The leading hotel data collector, STR Global, projects that U.S. hotel demand was stronger than expected in the second quarter. Along with that, the research firm upped its full-year 2014 occupancy and average daily rates expectations.
Occupancy is expected to rise 2.6% year-over-year for 2014 and average daily rates are expected to be up 4.2%. So not only are hotels seeing increased demand, but they’re also getting higher revenues per room.
Driving these rate increases is a low-supply environment. During the recession, we saw a steep pullback on new hotels being built and even closure of underperforming locations. This low-supply environment will give the remaining players the opportunity to increase prices going forward.
Without further ado, here are the top 3 hotel stocks to stay in your portfolio:

Hotel Stock No. 1: Marriott International (Nasdaq: MAR)

Marriott runs the Ritz-Carlton, Renaissance, Courtyard, Fairfield and Marriott brands, among others. It has quadrupled its number of brands to 20 over the last two decades and now operates in nearly 80 countries.
This stock has been one of the best performers in the space over the last three years. Its shares have outperformed the Dow Jones U.S. Travel & Leisure Index (DJUSCG) by 50% over that period.
Marriott’s dividend yield, at 1.2%, is the lowest of the three stocks I’m listing. But it’s very shareholder friendly, given its buyback plan.
It repurchased $300 million worth of shares during the second quarter and has purchased over $700 million in shares year-to-date. For all of 2014, Marriott expects to return between $1.35 billion to $1.6 billion to shareholders, which at the midpoint is roughly 7.5% of its market cap.
Marriott is also looking to tap into the large and growing Chinese market. China is Marriott’s second-largest market besides North America. The hotel operator plans to double its number of China properties by 2015.

Hotel Stock No. 2: Starwood Hotels & Resorts Worldwide (NYSE: HOT)

Some of Starwood’s top brands include St. Regis, W, Westin, Sheraton and Aloft. You’ll not only be capitalizing on the resurgence of the North American travel market, but Starwood is one of the best companies for capitalizing on the China travel boom. Starwood has over half of its properties located outside the U.S.
Starwood offers a 1.7% dividend yield and plans to return 25% to 40% of its earnings via dividends going forward. It’s upped its dividend at an annualized rate of 8.5% over the last five years, compared to just 1.2% for the industry average. This year also marks the first year that Starwood is paying a quarterly dividend payment, as opposed to an annual payout – which we like.
Another potential catalyst for Starwood is to spin out its timeshare business. This would allow the company to monetize this asset, while allowing it to focus solely on the hotel business. This is a move that top competitor, Marriott, completed in 2011, with its timeshare business now trading as Marriott Vacations Worldwide (NYSE: VAC).

Hotel Stock No. 3: InterContinental Hotels Group (NYSE: IHG)

This is perhaps the most interesting pick. InterContinental offers the highest dividend yield at 2.4%, but also trades at the lowest forward P/E ratio (price-to-earnings ratio based on next year’s earnings estimates) of the three, coming in 21.5. InterContinental is known for the Holiday Inn, Staybridge and Candlewood brands.
Thanks to its asset-light business model, InterContinental also enjoys profit margins that are double, sometimes triple, its larger peers. Whereas most major hoteliers own hotels, InterContinental focuses on hotel management and brand building, owning only a small portion of its hotels. The hotel operator also generates over 50% of its revenues from outside the Americas.
The latest news for InterContinental is that activist hedge fund, Marcato Capital, is pushing the company to sell itself to one of the larger players. Marcato owns roughly 4% of the hotelier. Back in May, it was rumored that Starwood was interested in buying up InterContinental for £6 billion, which would form the largest hotel company by market cap. InterContinental rejected the bid. Turns out, the bid was more likely from Wyndham, which is primarily a vacation rental company.
Nonetheless, Marcato has hired an investment bank to put more pressure on InterContinental to sell itself. Being that InterContinental is domiciled in the U.K., an American-based company could also engage in a tax inversion by buying up InterContinental.
The hotel industry certainly looks to be heating up with M&A chatter and a loosening of traveler purse strings, which includes both individuals and businesses. Investors wanting to capitalize on the underrated resurgence in hotel bookings have ample opportunity to do so. If the idea of traveling with the crowds has kept you at home this summer, you should still be able to collect a cool payout by investing your vacation money in these dividend-paying companies – all from the comfort of the lawn chair in your backyard.

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