Ride Through the Storm With This High-Yield Dividend Stock

Fears of a global economic slowdown persist, yet the S&P 500 Index continues to eclipse new highs. Concerns over geopolitical risk amid global trade concerns have weighed on investor sentiment, particularly when it comes to cyclical industries. For example, shares of travel and leisure giant Carnival Corp. have declined 6% so far in 2019, compared with a roughly 19% year-to-date gain for the S&P 500. But this could simply represent a buying opportunity for long-term investors. Sentiment toward stocks like Carnival has worsened over the course of 2019, but the company's fundamentals remain healthy. The stock appears to be undervalued, and currently offers a high dividend yield of 4.3%. While Carnival would be negatively impacted by a global recession, the stock could generate strong returns if a recession does not occur. Earnings Review & Growth Outlook Carnival is one of the world's largest travel and leisure companies with a portfolio of nine of the world's leading cruise lines. The cruise lines operate over 100 ships visiting over 700 ports around the world, with 19 new ships scheduled to be delivered through 2025. The comp has 11 different brands that collectively generate about $20 billion in annual revenue and the stock trades with a market capitalization of $32 billion. Carnival reported quarterly earnings on June 20 and results were stronger than expected, but investors reacted negatively after the company reduced guidance. Total revenue came to $4.8 billion, up from $4.4 billion in the same quarter last year. In constant currency, net cruise revenues rose 5.2%. Gross revenue yields increased 5.6%, and 0.6% in constant currency. This was slightly better than March guidance of flat yields. Adjusted earnings per share came in at $0.66 per share against $0.68 in the year-ago period as management said that fuel prices and currency exchange rates combined to produce a $0.09 headwind for earnings per share. Carnival reduced guidance for the full year, as management now expects adjusted EPS of $4.25 to $4.35 per share, down from $4.35 to $4.55 previously. Investors sold the stock heavily as a result, which explains the weak performance of Carnival stock over the course of 2019. But assuming the global economy avoids a deep and protracted recession, Carnival's future growth prospects remain quite attractive. Despite its reduced guidance, Carnival still expects full-year constant currency net cruise revenues to be up approximately 4.5%, with capacity growth of approximately 4.5%. Carnival stated in its most recent quarter earnings report that advanced bookings for the remainder of the year remain slightly ahead of last year, at prices that are comparable as well. And, while rising fuel costs took a bite out of profit margins last quarter, oil prices continue to fall. WTI crude now sits near $57 per barrel in the United States, well below its 52-week high of $74 per barrel, providing a positive tailwind for Carnival's bottom line. Even with reduced guidance for this year, Carnival still expects to be highly profitable, which fuels the company's impressive cash returns to shareholders. Set a Course for Dividends Carnival recently authorized a new $1 billion repurchase program, which will serve as an additional boost for EPS growth. In addition, the company returns lots of cash to shareholders as a dividend. Carnival stock currently pays an annual dividend of $2.00 per share, which represents a hefty yield of 4.3%. This is more than double the average dividend-paying stock in the S&P 500 Index, making Carnival an attractive stock for income seekers. And, the dividend payout appears secure. Based on management's revised full-year guidance, Carnival is expected to have a dividend payout ratio below 50% for 2019. A company distributing less than half of its earnings as a dividend should be able to maintain its dividend payout, unless earnings suffer a massive decline, which seems unlikely even in a mild recession. Cruise lines do suffer during recessions, as Carnival did in 2009. In total, Carnival's EPS fell 24% from highs in 2007 to lows in 2009. And, the company eliminated its dividend in 2009 due to the Great Recession. If another recession occurs on par with the Great Recession, Carnival could be at risk of a dividend cut. But the company should be able to sail through a relatively modest downturn. Carnival's competitive advantage is in its immense size as well as its world-class collection of brands that service different consumers; none of its competitors can match its competitive advantages. Investor sentiment could also be buoyed by Carnival's insider buying. In a Form 4 filing with the SEC dated June 27, it was revealed that Carnival CEO Arnold Donald bought just under $1 million worth of stock in the company during the week ended June 25, purchasing 22,050 shares at an average price of $45.23 per share. Such a large CEO purchase could be a good sign and restore investor confidence in the company's future direction. Final Thoughts Consumer cyclical companies, particularly those in the travel industry, are often hard-hit during a deep recession. But In an environment of low interest rates and rising stock markets, high yields are hard to find. For long-term investors, the recent weakness in Carnival stock could be a long-term buying opportunity. This is especially true for income investors, as Carnival stock now yields above 4% with a dividend payout that should be sustainable in all but the absolute worst economic climates. Carnival stock is a buy for income investors willing to take a bit more risk for the opportunity of superior future returns.

Ride Through the Storm With This High-Yield Dividend Stock

Concerns over geopolitical risk amid global trade concerns could represent a buying opportunity in this stock.

Columnist Conversation

Tuesday Morning Fibocall for 9/29/2020

Another Nice Win for the Stocks Under $10 Portfolio

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.