University of Houston, 4333 University Drive, Houston TX 77204-2000, (713) 743-1050.
© 2013 University of Houston. All rights reserved.
| Title | Marriott Corporation, 1980 Annual Report |
| Creator (LCNAF) |
|
| Publisher | Marriott International, Inc. |
| Date | 1980 |
| Description | Marriott Corporation Annual Report for calendar year 1980. |
| Subject.Topical (LCSH) |
|
| Subject.Name (LCNAF) |
|
| Genre (AAT) |
|
| Language | English |
| Type (DCMI) |
|
| Original Item Location | Marriott Hotels Collection |
| Digital Collection | Annual Reports from the Hospitality Industry Archives |
| Digital Collection URL | http://digital.lib.uh.edu/collection/hiltonar |
| Repository | Hospitality Industry Archives, Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston |
| Repository URL | http://www.uh.edu/hilton-college/About/hospitality-industry-archives |
| Use and Reproduction | No Copyright - United States |
| File Name | index.cpd |
| Title | Image 24 |
| Format (IMT) |
|
| File Name | hiltonar_201609_052_024.jpg |
| Transcript | Financial Strategy During 1979 and 1980, Marriott Corporation repurchased 13 million shares of its common stock for $259 million. I nvestors have placed various interpretations on this strategy. Actually, this action represented the most reasonable alternative for using the substantial excess debt capacity which accumulated in the late 1970s. Interest Coverage* 76 77 78 79 80 "The ratio of earnings before net interest taxes and non-cash cha rges, less required capital replacements, divided by net interest expense. Excess Debt Capacity In 1975, Marriott Corporation conducted a strategic self-appraisal which concluded that maintaining 20% earnings' growth and improving return on investment would be the principal financial objectives for the remainder of the decade. Management designed and implemented a three-pronged program to: □ Sell idle and low yielding assets. □ Increase return requirements on new capital investment □ Reduce capital intensity of the hotel business by emphasizing management agreements. By the end of 1979 the program had exceeded expectations: Return on investment had doubled, net income had grown at a 31 % compounded rate and interest coverage had risen from 3.8 to 6.8 times. Internal projections indicated that during the 1980s the company would realize its targeted 20% average annual earnings'growth rate within existing business lines, without acquisition or further diversification. Projections also indicated interest coverage would continue to rise and the company would build substantial excess debt capacity. Maintaining excess debt capacity is inconsistent with the goal of maximizing shareholder wealth: □ Unused debt capacity is comparable to unused plant capacity, because the existing equity base can support additional productive assets. Fully utilizing this capacity maximizes shareholders' returns. □ Debt is less expensive than equity because it is tax deductible. High proportions of debt therefore, reduce a company's weighted cost of capital and increase the real returns to shareholders. □ Debt-financed real estate provides distinct advantages in an inflationary environment Strategic Alternatives Four possible alternatives existed for utilizing Marriott's excess debt capacity: 1. Accelerate growth of existing businesses. Since Marriott already was growing its businesses rapidly, further acceleration could outpace the company's ability to develop sufficient operating management 2. Diversify. Senior management's attention was focused on an aggressive hotel expansion program. The risk of diluting these energies in a concurrent diversification effort seemed imprudent Further, many other firms were attempting to solve their excess liquidity problems by acquisition—resulting in unattractive prices for quality opportunities. 3. Increase dividends. Marriott could pay out large dividends if investments yielding returns in excess of the compa ny's cost of capital were unobtainable. However, dividends would be taxed at ordinary income tax rates. 4. Repurchase shares. If the company's shares were undervalued, share repurchase could yield high financial returns. Further, the company also could utilize its debt capacity without straining operating management or assuming the risks associated with diversification. After a thorough study of the company's business prospects and projected cash flows, management concluded that the shares were undervalued. 20 |