Record Cash Sends Europe Travel Stocks to Valuation Jump

Investors are paying the most in almost 20 months for European travel and leisure stocks, betting management will return record cash at companies from Accor SA (AC) to InterContinental Hotels Group Plc (IHG) and Sodexo as dividends.

The Stoxx Europe 600 Travel & Leisure Index climbed 21 percent this year through yesterday. The gains sent its valuation up 24 percent to 1.99 times book value, the biggest increase among 19 industry groups in the benchmark Stoxx Europe 600 Index, according to data compiled by Bloomberg.

Travel and leisure companies may return money to investors after accumulating 16 billion euros ($20.7 billion) in cash and equivalents. That’s the most since at least 2003, according to company filings. Dividend yields at the firms are forecast to rise to the highest level since 2008 next year, according to analyst projections compiled by Bloomberg.

“They can sell assets, they can give money back to shareholders,” Pierre Mouton, a fund manager who helps oversee $6 billion at Notz Stucki & Cie. in Geneva, said in a phone interview. “Hotels have more flexibility to improve their profitability. Accor has sold actual hotel buildings to focus on operating the hotels. That allows a company to cut debt and arrive at a point where it can pay out to investors in the form of dividends or share buybacks.”

Top Dividends

Investors whipsawed by fluctuating markets have been drawn to stocks paying the biggest dividends. The Stoxx Europe Select Dividend 30 Index (SD3P), a gauge tracking companies with the top dividend yields across 18 western European nations, reached its highest level since March last month, data compiled by Bloomberg show. The measure trades for 9.71 times estimated earnings, near the most expensive valuation this year, according to the data.

The Stoxx 600 sank 14 percent from March 16 through June 4 amid concern Greece will be forced to leave the euro currency union. The benchmark gauge for European equities has since rallied 16 percent as the European Central Bank agreed to implement unlimited bond purchases to control borrowing costs in the region’s weakest economies.

Travel companies are set to boost dividends faster than other industries. Yields at companies in the Stoxx travel and leisure index will climb to 3.8 percent in 2013 from 3.5 percent this year, while for the broader Stoxx 600 they will advance to 4 percent from 3.9 percent, according to analyst projections compiled by Bloomberg.

European travel and leisure shares slipped 0.3 percent at 8:52 a.m. in London today, while the Stoxx 600 lost 0.6 percent.

Accor Debt

Accor, Europe’s largest hotel operator, said on Oct. 2 it will cut debt by 780 million euros after selling the Motel 6 chain for $1.9 billion. The shares rose 21 percent in 2012 through yesterday and touched a one-year high in August. The Paris-based company will increase its regular annual dividend to 68 euro cents next year from 65 cents in 2012, Bloomberg forecasts that account for earnings and options prices indicate.

InterContinental, the world’s biggest provider of hotel rooms, has gained 25 percent this year. In August, the stock reached the highest price since it started trading in London in 2003 after announcing a plan to return $1 billion to shareholders through a special dividend and share buyback.

The Denham, England-based company said this week that U.S. revenue per available room, a measure of rates and occupancy known as revpar, grew 4.6 percent in the third quarter.

Sodexo Yields

Sodexo (SW), the second-largest provider of catering services, will raise dividends the most among Europe’s travel and leisure stocks, Bloomberg data show. Payout yields at the Issy-les- Moulineaux, France-based company will climb to 2.7 percent in the next 12 months from 2.4 percent, according to Bloomberg dividend forecasts.

The Stoxx travel and leisure index’s valuation retreated 22 percent last year, the fourth-largest drop among Europe’s 19 industry groups and more than the 14 percent drop in the Stoxx 600’s price-to-book ratio, data compiled by Bloomberg show.

“Valuations were very low, to the point of being not logical,” Emmanuel Soupre, a fund manager who helps manage $5.5 billion at Neuflize Private Assets in Paris, said in a phone interview. “These stocks were really hurt by the crisis.”

Analysts have increased their full-year profit forecasts for travel and leisure companies. Earnings-per-share projections rose 3.1 percent since the Sept. 14 low to 7.99 euros a share excluding some items yesterday, according to estimates compiled by Bloomberg.

‘Outdated’ Airlines

While hotel and leisure companies may be attractive, investors should avoid airlines and their “outdated” business models, said Matthieu Giuliani of Banque Palatine SA. Carriers faced the highest premiums for jet fuel since 2008 in Europe and Asia last month, Bloomberg data show.

Deutsche Lufthansa AG (LHA) said last month its cost-cutting program won’t be sufficient to deliver an improvement in earnings this year. Europe’s second-biggest airline is offering buyout and early retirement packages to employees at its main base in Frankfurt as part of the carrier’s 1.5 billion-euro savings drive.

“The models of airline companies, other than low-cost, are outdated,” Giuliani, who helps manage $4 billion at Banque Palatine in Paris, said in a phone interview. “Oil prices are expensive and competition makes things very complicated. It’s becoming difficult for them.”

For Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris, travel companies will continue to gain faster than the broader market if investors believe the ECB’s actions are controlling the debt crisis.

“It’s a sector that can rise or fall quickly,” Porta said by phone. “If the efforts of central banks don’t work, this industry can suffer.”

To contact the reporters on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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