Photo: Bloomberg News
Marriott International’s dividend isn’t exactly the stuff of an income investor’s dreams. The stock yields about 1%, well below the Standard & Poor’s 500 index’s average of 1.9%.
But the payout—both the actual amount paid to shareholders and its dividend as a percentage of earnings—is exactly where Marriott (ticker: MAR) wants it to be, based on its capital needs and growth plans. In other words, the company wants to hang on to enough of its profits to fund real growth. Last year alone, the hotel operator added more than 76,000 rooms, or about 6% of its base, bringing the total to 1.25 million rooms.
“First and foremost, it’s about investing in our business,” says Leeny Oberg, Marriott’s chief financial officer, of the company’s capital-allocation process. “The first step is: How much do we need to organically grow our business?”
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We recently spoke with Oberg to get some insights into how companies set their dividends. In Marriott’s case, the process results in a classic trade-off for investors: Those willing to forgo fat dividends have reaped the rewards of steady growth. Earnings grew at a 20% compound annual clip over the past five years. And the stock outperformed the S&P 500 over one-, two-, three-, five- and 10-year periods. At a recent $138.98 it’s up 2.39% so far this year.
To keep funding growth, Oberg says, Marriott typically sets aside $600 million to $700 million a year, with a big portion earmarked “to help get new deals with [hotel] owners to add more units.”
Marriott owns less than 1% of the hotels in its system, preferring to manage or franchise them. That throws off steady streams of fees over long periods, often for several decades, and provides ballast to the company’s financial stability in a cyclical business.
Marriott, Oberg says, typically generates about three times what it needs to invest in its business. Then “the question becomes: “What do we do with what’s left over?” From time to time, the company has used its excess cash to make acquisitions, mostly smaller ones, such as when it acquired Protea Hotels, based in South Africa, in 2014 for about $200 million. In 2016, it finalized its $13 billion deal for Starwood Hotels & Resorts, which brought into its portfolio brands such as Westin, W Hotels, and St. Regis.
That deal did keep a lid on the dividend last year, which on a quarterly basis was increased from 30 cents to 33 cents a share. That 10% increase was lower than what it had been in recent years, partly owing to Marriott taking on about $3.5 billion of debt to complete the deal.
In recent years, the company’s payout ratio has been around 30%, compared with about 45% for the S&P 500.
Keeping the dividend near a 30% payout ratio gives the company flexibility to buy back shares, adapt to changing economic cycles, and make deals, Oberg says. Share repurchases can be increased or decreased quite easily.
For every dollar that Marriott returns to shareholders, roughly 80 cents goes to buybacks, and the remainder for paying dividends. In its guidance to the Street, Marriott said it plans to return about $2.5 billion to shareholders this year, down from $3.5 billion last year, partly owing to fewer asset sales this year.
If the company ends up earning $5.39 a share this year, investors can expect a dividend of $1.62 a share, or 30% of profits—up 25%.