Billionaire Bill Ackman Has Close to 20% of His Portfolio in 1 Magnificent Travel Stock

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Bill Ackman is one of the most followed investors of the 21st century. The billionaire and manager of the $10 billion-plus hedge fund Pershing Square espouses a Warren Buffett-style investing strategy. He aims to build a concentrated portfolio of high-quality stocks that he can hold for many years.

Many of Ackman's stock positions are over 10% of his portfolio. One stock he has owned since 2018 is Hilton Hotels (NYSE: HLT). Shares are up close to 200% since the beginning of 2018, and it now makes up 18.5% of the Pershing Square portfolio.

Here's why Ackman may be attracted to the storied hotel brand, and why the stock is a perfect play on the growth of global travel.

A trusted hotel brand and a take rate on global travel

The Hilton hotel brand is close to 100 years old. Started in Texas, it has aimed to provide an upscale hotel experience and build a trusted brand for travelers. Today, the brand is as powerful as ever, but the business model has slightly changed. Instead of outright owning all of its hotels, Hilton licenses its brand to property owners. The owners put up all the capital investment, making Hilton a capital-light model that simply licenses Hilton to these properties.

By putting hotels in the Hilton system, owners do sacrifice a percentage of spending at each property that gets paid back to Hilton for franchising the brand. However, owners appreciate this because of the built-in trust in Hilton. If you license the Hilton brand, you generally get higher occupancy rates and can raise prices on your rooms. This makes up for the license fee paid to the Hilton Corporation every year. A win-win for both parties.

Hilton's franchise strategy acts as a growing take rate on global travel. The company is consistently adding new hotel rooms through acquisitions (it recently added the Graduate Hotel Brand, for example) as well as organic development for new properties. Last quarter, it had 18,000 net room additions across the world. On top of this growth, Hilton earns more on hotel room price inflation. It expects revenue per room to grow by 2% to 3%, on average, this year.

This is how Hilton generates $10.8 billion in annual sales along with $2.34 billion in operating income. The combination of growth in hotel rooms and price increases leads to more money flowing back in licensing fees to the Hilton parent corporation.

Juicing returns with stock buybacks

With all the cash flowing up to its balance sheet and little need for capital investments (remember, the owners build the hotels for Hilton), the company has plenty of excess cash to return to shareholders.