Carnival: Sailing to Growth & Income

11/15/2016 10:00 am EST

Focus: STOCKS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

Our latest recommendation is the largest leisure travel company in the world; its cruise ships sail all over the world, hosting over 10 million passengers per year, observes Chloe Lutts Jensen, income expert and editor of Cabot Dividend Investor.

Carnival Corp. (CCL) operates 10 cruise lines include Carnival, Princess, Holland America and Cunard. The firm has struggled to increase top-line revenue in recent years, and its stock is off 14% year-to-date.

Investors panic every time an epidemic, natural disaster or terrorist attack affects travel.

But management understands that these unpredictable events are just part of doing business, and is laser-focused on improving efficiency so that earnings continue to grow regardless of the macro environment.

Management has raised occupancy and replaced aging ships with new, more efficient liners that can hold more passengers and is leveraging its scale to find synergies between its various cruise lines.

As these efforts have paid off (and with a tailwind from falling oil prices), operating margins have improved from below 9% in 2013 to over 18% this year (so far).

As a result, earnings per share have grown by an average of 24% in each of the last four years, even as revenue has remained about the same.

CCL’s annual payout of $1.40 yields nearly 3.0%. Management is targeting a 40% to 50% payout ratio, which they believe will keep the dividend sustainable in most market conditions.

Despite management’s success in improving margins and growing earnings, CCL is down 14% year-to-date, trading at a P/E of 14.4. The stock is even more undervalued on a forward basis, with a forward P/E of 12.1.

We caution that geopolitical concerns can weigh heavily on Carnival’s stock. However, for investors with tolerance for volatility, Carnival now presents a compelling value.

Though lacking momentum — this is not the best investment for short-term traders — I expect CCL to deliver dividend growth and capital appreciation over the medium-to long-term.

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