Is Starwood Losing Star Power?

Envy is sinful, so forgive me, please: Barry Sternlicht makes me as green as Kermit the Frog. At 42, he is moving upstairs to be "executive chairman" of Starwood Hotels & Resorts Worldwide (HOT ), the hotelier responsible for the Sheraton, St. Regis, Westin, and W chains. This means he'll do assorted guru stuff, strategize, and play the ambassador, while spending more time with his wife and three kids at their Greenwich (Conn.) home. To do the heavy lifting back at the office, Sternlicht is searching for a new chief executive.

Nice, huh? Just the same, I don't envy Sternlicht for investors' reaction to the Oct. 30 news of his ascension plan. The stock soon fell 9%, to under 33. Starwood was surprised by the slide, a spokesman told me. Had the company not jumped into the market and bought back shares for the first time since 2001, the price likely would've gone lower. Every dollar off the stock means a paper loss to Sternlicht, whose Starwood holdings top $300 million, of more than $9 million.

SOME MAY SEE the market response as a flattering pout that Sternlicht, a proven innovator who dreamed up the trendy W chain, will be working less. Others may see it as a chance to buy one of the year's hottest stocks (chart). But if you ask me, it's a cry of dismay that Starwood may be setting out on a course destined to yield a host of new, unseen risks. The next CEO will be someone who "ruthlessly executes Barry's vision. We want someone who can execute, execute, execute," Starwood's spokesman told me. "Barry has a great new idea every day, and he wants it executed by that very afternoon." Yet after five tumultuous years, investors may prefer that Starwood simply make good on old promises that it's still struggling to fulfill.

Faced with a hostile change in the tax law back in 1998, Starwood underwent a major reorganization. It simplified its structure, in part to encourage Standard & Poor's (MHP ) to list it in its 500-stock index. Beyond that, a key to the corporate makeover was a sharp cut in the dividend, to a yearly rate of 60 cents from $2.08. Freeing that cash, Starwood expected, would fuel growth. Patient investors would be rewarded: Starwood aimed for yearly dividend hikes of 15%. "Our stock represents an extraordinary value," Sternlicht said back then.

Within two years, Starwood met its goal of an S&P 500 listing. And it made good on its indicated dividend boosts in 2000 (up 15%) and 2001 (15.9%). Last year, however, the payout rose just 5%, and there it stands: No increase this year, and none penciled in for 2004. The 15% dividend growth rate remains a corporate goal, Starwood says. It has husbanded its cash because of the many woes suffered by hoteliers since 2001 -- recession, terror attacks, SARS, war -- along with its focus on lowering debt. In any case, since Starwood unveiled its reorganization in August, 1998, the stock's total return to investors has badly lagged those of the broad market and a leading rival, Marriott International, despite Starwood having spent some $867 million on stock repurchases.

Now investors must wonder whether Sternlicht's new role, plus a fresh CEO, will add up to higher returns. Longtime Starwood watchers are in show-me mode. "Barry is a very strong personality, and he deserves kudos for pushing what had been a sleepy company to become more innovative," says Mike Kirby, a principal at Newport Beach (Calif.) real estate research boutique Green Street Advisors. "But Barry is a tough guy to work for. There have been any number of people who have left that company who worked closely with him." Now above $34, the stock trades at 36 times bullish estimates of 2004 profit, even as Starwood sees 2004 earnings before interest, taxes, depreciation, and amortization rising 5% to 8%. Thou shalt not envy Sternlicht's successor.

By Robert Barker

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