People love traveling. It's an opportunity to relax, see new places, be adventurous, party, or escape the daily grind. Some 40% of Americans plan to travel more in 2024 than they did in 2023, according to Forbes. Many will use online travel agencies (OTAs) like Booking.com, Priceline, KAYAK, or Agoda, all of which fall under the Booking Holdings (BKNG -1.15%) umbrella.
Most people book their travel online, and the percentage is growing -- OTAs account for nearly 40% of these bookings. This percentage is even higher with millennials and Gen Y, which is an excellent sign for Booking's growth runway. Many travelers prefer the convenience of OTAs, which allow travelers to book flights, hotels, rental cars, and experiences in one place, often at a discount.
Booking also supports short-term rentals (it calls them alternative accommodations). There were 3 million alternative accommodations on the site at the end of the first quarter (up 7% year over year), accounting for 36% of Booking.com's room nights booked. The breadth of offerings makes Booking a one-stop shop for everything travel-related.
Booking's revenue and free cash flow (FCF) have exploded since the pandemic because of these trends, as shown below. It's what Booking does with the cash that should intrigue investors.
BKNG Free Cash Flow data by YCharts
Share buybacks vs. dividends
When researching stocks, many investors focus on dividends, but I home in on share buybacks. When companies repurchase their stock, the number of shares outstanding decreases, increasing each shareholder's ownership interest. Repurchases also increase earnings per share (EPS), typically leading to a higher stock price. And, unlike dividends, investors don't pay annual taxes on repurchases -- a major plus.
Other advantages include creating demand in the market and allowing investors to rest easier if the stock drops. Imagine a company using $1 billion to repurchase its stock at $100 per share. This will take 10 million shares off the market. However, if the stock drops to $80, the same $1 billion will reduce the share count by 12.5 million shares. When the stock recovers, shareholders benefit from an even lower share count.
The disadvantage of buybacks is that the shareholder doesn't receive cash payments. However, many companies that repurchase stock also pay cash dividends. Booking began paying a dividend for the first time in Q1 2024 and expects to continue to pay quarterly. The yield is small but will likely rise over time.
Is Booking Holdings stock a buy?
Booking spent $10 billion buying back stock over the trailing 12 months, reducing the share count by 6%. As shown below, the share count has dropped 20% over the past five years, despite pausing buybacks during the pandemic's height.
BKNG Stock Buybacks (TTM) data by YCharts
Now that the pandemic's worst is in the rearview mirror, Booking is buying back more shares than ever. The company can do this because its business model is exceptionally profitable and generates tons of free cash flow. In 2023, the company reported $5.8 billion in operating income on a 27% margin and $7 billion in free cash flow on a 33% margin.
The best stock to compare Booking to is Airbnb, since both are growing and have terrific cash flow. Expedia is a similar platform but struggles with much smaller margins (8% operating and 14% FCF in 2023). As you can see below, Booking is less expensive than Airbnb based on cash flow, but has a higher price-to-earnings (P/E) ratio.
BKNG Price to Free Cash Flow data by YCharts
Booking commands a higher P/E because it faces fewer regulatory risks than Airbnb, which must contend with local ordinances limiting or banning short-term rentals. Booking's operations are also much more profitable. Still, the higher P/E could be a turn-off for some investors, representing a short-term risk.
Travel bounced back nicely from the pandemic, and Booking's results are terrific. The runway ahead is long because younger generations are much more likely to book travel online. Share buybacks and the new dividend are huge incentives that make Booking Holdings an excellent long-term investment.
