Over the past 12 months, the Ocado (LSE: LON:OCDO) share price has surged 154.4% making it the best performing stock in the FTSE 100.
However, there’s still one vital component missing from the Ocado story, and that’s profit. The City is not expecting the firm to report a profit for the next two years, and while investors have celebrated the company’s progress in signing deals, the financial disclosure around these deals from management has been limited.
Cloudy outlook There’s no doubt that Ocado has a product that retailers want. The company has inked agreements with some of the biggest retailers in the world to help them build automated warehouses and fulfil customer orders, but signing contracts is one thing, generating cold hard cash is another. It could be years before investors see a return from these agreements.
Ocado’s lack of profit generation is the main reason why I’d advise selling the shares after their recent run. Until the company starts earning, it’s going to be challenging to place a value on the stock, and it could be a bumpy ride from here to profitability.
I prefer to invest in shares that are already generating a profit and have a track record of returning funds to shareholders, like InterContinental Hotels Group (LSE: IHG).
Cash cow Owner of Holiday Inn and Kimpton hotels, IHG is in the middle of a growth spurt. At the beginning of the month, the firm announced that it had added 12,000 rooms to its portfolio in the three months to March and had another 24,000 in the pipeline. The firm is mainly focused on growth in Asia. IHG opened 18 hotels and signed another 52 in Greater China during the first quarter, a record rate of signings for the company.
To complement the growth of its existing brands, IHG bought Six Senses, a group of luxury resorts in February for $300m. Management is planning to add an additional 60 sites to this brand over the next decade, funded with $125m of annual savings from the rest of the business.
Earnings expansion IHG’s growth focus will lead to a 12% increase in earnings per share in 2019 according to City analysts, followed by growth of 8.3% in 2020. This growth will, according to analysts’ estimates, allow for a 15.2% dividend increase in 2019 and 9% in 2020. While this growth will only give a yield of 2.4% for 2019, I should point out that IHG has a history of returning any extra cash to shareholders with special dividends.
As I pointed out the last time I covered IHG, the firm has issued 799p in special dividends alone during the past three years. In 2018, special and regular dividends from the company amounted to 291.7p per share for a total yield of 6.1% (assuming investors acquired the stock at the beginning of 2018).
Compared to Ocado’s lack of profitability, I think it’s impossible to ignore these mouth-watering cash returns. That’s why I’d dump the Ocado share price and buy IHG instead today.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019