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Is InterContinental Hotels Group PLC (ADR) (IHG) Group the Ultimate Retirement Share?

LONDON — The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There’s no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through, at best, for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

InterContinental Hotels Group PLC (ADR) (NYSE:IHG)In this series, I’m tracking down the U.K. large-caps that have the potential to beat the FTSE 100 over the long-term, and support a lower-risk income-generating retirement fund. (You can see the companies I’ve covered so far on this page.)

Today, I’m going to take a look at InterContinental Hotels Group PLC (ADR) (LSE:IHG) (NYSE:IHG), which owns global hotel brands including Crowne Plaza, Holiday Inn, and Staybridge Suites.

InterContinental Hotels Group vs. FTSE 100
Let’s start with a look at how InterContinental Hotels has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 5-Yr. Trailing Avg.
InterContinental Hotels Group (34%) 63.8% 42.2% (4.4%) 49.8% 19.9%
FTSE 100 (28.3%) 27.3% 12.6% (2.2%) 10% 5.2%

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

InterContinental Hotels was formerly part of a company called Six Continents, which had its roots in the Bass empire. In 2003, Six Continents split itself into two parts — InterContinental Hotels Group, and pub chain Mitchell & Butlers plc (LON:MAB) — both of which gained new listings on the London Stock Exchange.

InterContinental’s performance has been strong since then, and it has delivered total returns nearly four times greater than the FTSE 100 average over the last five years. The question for retirement investors is whether it can maintain this kind of performance.

What’s the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let’s see how InterContinental Hotels shapes up:

Item Value
Year founded 2003
Market cap 5.1 billion pounds
Net debt 691 million pounds
Dividend Yield 2.2%
5-Year Average Financials
Operating margin 23.9%
Interest cover 7.4 times
EPS growth 6.4%
Dividend growth 7.7%
Dividend cover 2.4 times

Here’s how I’ve scored InterContinental Hotels Group on each of these criteria:

Criteria Comment Score
Longevity A mixture of old and new brands in a young organization. 3/5
Performance vs. FTSE Very strong. 5/5
Financial strength High margins and good cash generation, but debt doubled last year. 4/5
EPS growth Steady earnings growth. 4/5
Dividend growth Well-covered, with steady growth but below-average yield. 4/5
Total: 20/25