Whitbread not on my ‘buy list’ despite solid 1st quarter results

whitbread dividend

There’s a lot of things I like about Whitbread (LON:WTB) (WTB.L), owner of Premier Inn and Costa Coffee. Premier Inn is the UK’s largest hotel brand and is a leader in the value hotel sector, offering a great product at very reasonable prices. With sterling having fallen considerably since Brexit, the brand should benefit from increased tourism to the UK. And walk past any Costa in the morning and you’ll see no shortage of demand for its coffee.

Whitbread has ambitions growth plans, and wants to increase the number of Premier Inn UK rooms from 69,000 to 85,000 and hit global system sales of £2.5bn for Costa by 2020.

1st quarter trading statement

The hospitality giant released its first quarter trading statement last week, and it appears that things are ticking along are nicely. For the 13 weeks to 1 June  2017, like for like sales rose 2.9% and total sales increased 7.6%. Costa like for like sales were a little disappointing, rising just 1.1%, however, the performance of Premier Inn was robust, with like for like sales up 4.7% and total sales rising 9.2%.

Chief Executive Alison Brittain stated “We have had a good start to the year, with first quarter sales growth of 7.6%, in line with our expectations. Our continued drive to grow and innovate in our core UK businesses, focus on our strengths internationally and build capabilities to support long-term growth, combined with our ongoing cost efficiency programme, gives us confidence that we will make further good progress this year.

Reasonable valuation

A little over two years ago, Whitbread was trading around the 5,500p mark, however today the stock can be bought for under 4,000p. With City analysts forecasting earnings per share of 256p for FY2018, Whitbread’s forward looking P/E ratio is 15.5, which does not look that unreasonable given the company’s track record of revenue and earnings growth.

Low yield

However, there’s one reason I won’t be buying Whitbread right now and that’s the company’s low dividend yield.

Whitbread paid out 95.8p per share in dividends for FY2017, which at the current share price, equates to a yield of 2.4%. While coverage was high at 2.6 times, as a dividend investor that yield is simply too low for me to warrant buying the stock right now. Dividend growth of 5% is forecast for this year, which would nudge the yield up to 2.6%, but that’s still a little underwhelming in my view.

For this reason, I’ll keep my Whitbread on my watchlist and look at other dividend opportunities for now.

Disclosure: Edward Sheldon, CFA has no position in Whitbread. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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