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A Carnival ship.
Photograph by Andy Newman/Carnival Cruise Lines via Getty Images
Carnival
shares have shed nearly half their value since the start of 2020. And as cruise ships continue to make headlines for coronavirus cases, Carnival’s generous dividend could be at risk, according to an analyst at Nomura Instinet.
Where we were. The coronavirus outbreak came at a terrible time for Carnival stock (ticker: CCL). Europe’s lagging economy had already been dragging on the company’s country-focused brands like Costa Cruises in Italy.
As the disease spreads in Europe and the U.S., the last place many people may want to be is stuck in close quarters on a cruise ship. Hundreds of guests and crew members came in contact with the novel coronavirus on Carnival’s Diamond Princess ship, which was quarantined for two weeks off the coast of Japan. Travel related-stocks like airlines and casinos have been slammed.
Carnival stock (CCL) has fallen about 48% from its close on Jan. 17, the Friday before reports of the coronavirus began influencing global equities. At recent levels, the stock’s dividend yielded a generous 7.37%.
What’s new. Nomura Instinet analyst Harry Curtis called into question Carnival’s dividend security in a research note on Thursday. Carnival recently had the best balance sheet among cruise lines, with net debt only double the company’s 2019 earnings before interest, taxes, depreciation and amortization, or Ebitda. Still, Curtis thinks such safety could be an illusion.
He thinks it’s likely that the coronavirus will lead to lower revenues and cash flow that could bring net debt to triple Ebitda for fiscal 2020, the 12 months ending in November.
And if Carnival’s revenue yield—a measure of how much money a cruise line makes from each passenger berth—falls 10% due to cancellations and pressure to cut prices , he thinks its Ebitda could fall to $4.25 billion. That would put its debt at 3.5 times Ebitda, according to Curtis.
“CCL has a conservative board, which faces maintaining the dividend in the face of rapidly rising leverage,” he wrote. “The related challenge is that CCL has been an attractive dividend yield stock. So the question is whether the board will sacrifice the relative strength of its balance sheet to maintain its generous dividend.”
A Carnival representative didn’t respond to a request for comment. Carnival Chief Financial Officer David Bernstein told Barron’sin June that the dividend is “sustainable through all cycles.” He noted at the time that it was within the company’s target range of 40% to 50% of net income.
Looking ahead. Morgan Stanley analyst Jamie Rollo pointed to growing risk to the company’s dividend last summer—well before the coronavirus.
He wrote in a note on Wednesday that his firm’s monthly online researching of cruise-ticket prices showed, “a significant deterioration from last month and also a weakening,” from checks the firm ran two weeks ago.
For the Carnival brand specifically, average forward pricing is down 8% from a year ago, according to Rollo’s analysis. For Carnival’s Holland America brand, the average forward price is down 7%. Its Costa Cruise brand is down 2%, while prices at its P&O UK Cruises are down 6%.
“A slight positive is that most brands show an improvement in pricing for sailings in the later end of the year,” he wrote, ” but this could simply be a function of cruise lines focusing on the dates that need to be sold first and hoping demand recovers later in the year.”
Carnival stock was down 2.5% to $27.15 on Friday. The S&P 500 index was down 1.7%. The Washington Postreported Friday that the Trump administration was considering tax relief for travel industries hit especially hard by the virus, but with nothing concrete, the news had little impact on the stock’s move.
—Write to Connor Smith at [email protected]
