We own Hilton (HLT). We bought it for clients after it underwent its three-way spin-off into Hilton Grand Vacation (HGV), Park Hotels & Resorts (PK), and Hilton (HLT).
Did we make a mistake? Maybe, according to this video.
The video was uploaded on March 29, 2017, and uses financial data as of year end 2016. This is crucial.
First, I’ll give the guy credit. He is practicing his valuation skills and he is putting himself out there. I’m curious to see how he arrives at his data points: real earnings, the amount of capital the company earned, the percentage the company needs to earn, and the amount of capital needed to maintain the business. These would be helpful to know.
The important issue that the video doesn’t cover and what affects the valuation is on January 4, 2017, Hilton Worldwide completed its corporate restructuring.
The new Hilton is an asset-light business. It no longer owns hotels or builds them. Hilton solely focuses on management contracts and its franchise business. The new Hilton needs very little capital to maintain and grow its business. Returns on invested capital should increase. High returns on invested capital with very little need to reinvest that excess capital will lead to more capital returns to shareholders via buybacks and dividend increases.
High returns on invested capital with very little need to reinvest that excess capital leads to increased capital returns to shareholders via buybacks and dividend increases.
The perfect example is Marriott after it spun-off it’s timeshare business in 2011. After that spin-off, Marriott focused solely on hotel management contracts and its franchise business like Hilton now.
Below is Marriott’s return on invested capital, total shares outstanding, and dividend per share from right before the spin-off of its timeshare business until its buyout of Starwood.
Hilton could and should follow the same pattern.
Hilton is the subject of our next dividend letter. Sign up now to get it.