The share buyback program and special dividends
Since the year 2004, InterContinental Hotels Group initiated a share buyback program and special dividends. In the fiscal year, the company successfully executed its $500 million share buyback program while $750 million was returned to shareholders through special dividend (InterContinental Hotels Group PLC 6, 50, 176). IHG perhaps believes that its shares are undervalued and therefore buyback would enhance earnings per share and increase the market value of outstanding shares.
IHG spent cash on buying back shares that would take time to be sold. Hence, liquidity and ability to pay short-term are reduced.
Overall, IHG will increase stock prices because of repurchase because it would demonstrate that its shares are undervalued. Otherwise, IHG would not purchase them back.
Acquisition
IHG acquired Kimpton Hotels & Restaurants for $430 million – a fully asset-light business (InterContinental Hotels Group PLC 13). The company completed the process by January 2015. Acquisition would improve the creditworthiness of the company. It is expected that acquisition of Kimpton Hotels & Restaurants should have significant impact on the company capital structure and profitability and, therefore, it would improve creditworthiness.
Expansion
IHG has expanded significantly in China’s tier cities with more rooms than its global competitors have. Consequently, the company is most likely to generate additional cash flows when these rooms are utilized and, therefore, increasing creditworthiness. Further, tier 2 and 3 cities are expected to create strong demands, as the company expects middle class Chinese to live in the selected cities by the year 2022 (InterContinental Hotels Group PLC 19).
Risk Management
IHG has established an efficient system for internal controls and risk management. The system identifies, evaluates, prioritizes and mitigates noted risks. The company believes that responsible business must have a robust system for risk management. Consequently, IHG is resilient, trusted and successful (InterContinental Hotels Group PLC 26). These qualities attributed to risk management control costs of operations and increase creditworthiness.
Management Performance
IHG relied on its talented team and management executives to deliver a robust performance that returned $1 billion to shareholders within the fiscal year 2014 (InterContinental Hotels Group PLC 6). The quality of management team increases creditworthiness the company. Inefficient management performance would not allow IHG to return money to its shareholders.
The Independent Auditor’s Report
- The company’s auditor
Ernst & Young LLP (EY) located in London, England is the company’s auditor (InterContinental Hotels Group PLC 95). The auditor is globally recognized as an independent, external auditor.
IHG paid $6.1 million, $5.8 million and $7.2 million as auditor’s remuneration for the fiscal year 2014, 2013, and 2012 respectively (InterContinental Hotels Group PLC 120). - Auditor responsibility
EY is generally responsible for auditing internal control over financial reporting of the company and express an opinion on the Group’s internal control over financial reporting based on the outcomes of the audit (InterContinental Hotels Group PLC 99). The auditor also reported its results to the Board of Directors and Shareholders of InterContinental Hotels Group PLC. - The company’s financial information and preparation
IHG management is responsible for the preparation and information contained in the financial statements. The management must ensure proper “internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the Annual Report and Form 20-F 2014” (InterContinental Hotels Group PLC 99).
The Auditor opined that IHG had efficient internal control financial reporting for the fiscal year reported based on the COSO provisions (InterContinental Hotels Group PLC 96). - Audit conducted in accordance with the standard
The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) (InterContinental Hotels Group PLC 99). As such, EY had to plan and conduct audit to attain reasonable assurance that proper internal control over financial reporting was observed in all financial materials. EY had to assess financial reporting, evaluate risks to determine weaknesses and existence, test, and assess design and operational efficiency of IHG. - The Opinion of the Auditor
EY asserted that the IHG financial statements provided fair, with respect to all materials, the consolidated financial position of IHG for the fiscal year 2014 and 2013, as well as consolidated results for operations and cash flows for every year represented (InterContinental Hotels Group PLC 99). The reporting adhered to International Financial Reporting Standards as provided by the International Accounting Standards Board.
Method(s) of Depreciation
- IHG uses a straight-line basis for all forms of depreciation while it evaluates residual value every year (InterContinental Hotels Group PLC 108).
- Implication of depreciation for the company
IHG assets depreciate and affect asset values, net income, equity and cash flow and profitability negatively. For instance, during the fiscal year 2014, 2013 and 2012, the company’s assets depreciated by $96 million, $85 million and $94 million respectively (InterContinental Hotels Group PLC 100). These figures show that expenses were incurred because of depreciation and amortization. Depreciation reflects outflow from the company. Specifically, depreciation is considered as a non-cash outflow or expense, and it is necessary to account for depreciation to determine the financial position and health of IHG, particularly when dealing with creditors.
Returning Money to Shareholders
Dividends
IHG returns money to shareholders. For instance, during the fiscal year 2014, the company paid more than $1 billion (including ordinary dividends) to shareholders (InterContinental Hotels Group PLC 6).
On 2 May 2014, IHG declared a $750m return to shareholders through a special dividend and share consolidation (InterContinental Hotels Group PLC 50). In addition, on 30 June 2014, IHG shareholders passed a resolution for share consolidation at the General Meeting of the Company based on 12 new ordinary shares of 15265/329p per share for every 13 existing ordinary shares of 14194/329p each. These changes were effected on 1 July 2014 (InterContinental Hotels Group PLC 124). Further, on 14 July 2014, the company also paid a special dividend of 293.0¢ per share.
Overall, when IHG pays dividend the market and investors would evaluate it positively through an increment in the stock prices.
Effects of Dividends on Creditworthiness
It is generally acknowledge that dividends take money out of the company and, therefore, creditworthiness declines. For instance, during the fiscal year 2014 and 2013, IHG paid dividend to non-controlling interests worth $1 million and $1 million respectively. In addition, the fiscal year 2014, 2013, and 2012 were characterized by dividend paid to shareholders as follows $942 million, $533 million and $679 million respectively for the abovementioned fiscal periods (InterContinental Hotels Group PLC 106).
As a result, IHG had less cash to meet short-term obligations leading to a decline in creditworthiness.
References
InterContinental Hotels Group PLC. Annual Report and Form 20-F 2014. Buckinghamshire, UK: InterContinental Hotels Group PLC, 2014. Print.