Warren Buffett says the best businesses are ones that can sustainably grow without needing to raise extra money, and on this basis InterContinental Hotels (IHG) ticks the right boxes.

The company is one of the world’s largest hotel businesses, operating brands such as InterContinental, Crowne Plaza, Holiday Inn, and more. With about 888,000 rooms globally, it is estimated to have a market share of more than 4%.

What sets it apart from many other hotel chains is its asset-light model. Where many peers own their bricks and mortar, most of InterContinental Hotels’ rooms are run on a franchise basis, with 99% of rooms operated under franchised agreements or managed on behalf of third-party hotel owners. That means the company does not own an extensive real estate portfolio.

As a result, it has relatively low running and maintenance costs, making InterContinental Hotels more robust in a slowing economy.

The model has paid off superbly for investors in the past. If you’d put £5,000 into the stock 10 years ago and reinvested dividends, the stake would now be worth £18,820 versus £9,199 from a FTSE 100 tracker excluding fees, based on data from FE Analytics.

InterContinental Hotels’ full year results are scheduled to be published on 21 February. Bank of America anticipates $381 million of free cash flow for 2022 from a 56% jump in operating profit to $834 million. Free cash flow is forecast to hit $526 million in 2023. This is the money left after keeping the business going to spend on dividends, share buybacks, debt reduction and acquisitions.

If Bank of America is correct, investors could be looking at $1.279 (103.5p) per share in dividends for the 2022 financial year versus $0.859 in 2021 and nothing from Covid-hit 2020. That’s roughly
a 2% yield.

Much of the anticipated progress in revenue per available room will be driven by a boom in travel across China where the company has substantial exposure.

InterContinental Hotels has a pipeline of approximately 278,000 new rooms, which is more than 30% of the current estate of hotel rooms already in use. Approximately one third (36%) of the new rooms are in China and the same again in the Americas (35%). Forty percent of the pipeline is already under construction.

Recent trading has been encouraging with revenue per available room above 2019 levels since July 2022. China has been well below pre-Covid times but there are hopes this will change as the economy starts to reopen thanks to pandemic restrictions being lifted.

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