Carnival: Forgotten dividend but a Multibagger perspective (NYSE: CCL)

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if you are waiting carnival corporation and plc (NYSE:CCL) to reset your dividend, you could be waiting a long time. Most investors are buying it as a recovery stock that could double. or triple your money because of the price appreciation.

Like its peers, the cruise company went off course during the onset of the coronavirus pandemic. It’s still bleeding losses this year, although, on the bright side, the losses are scaling back.

In fiscal 2020, it posted a net loss of $10.2 billion. In fiscal year 2021, the net loss was $9.5 billion. Its trailing 12-month (“TTM”) net loss is $7.1 billion. For reference, Carnival reported net income of around $3 billion in fiscal years 2018 and 2019.

Data by YGraphics

Consumer cyclical stocks are trading at some of their lowest levels in their trading history. Stocks rose from a 2020 pandemic low of around $12 to over $30 in 2021. That’s about 2.5 times investors’ money for people who timed stock trading well.

Alas, the rally fizzled out and CCL stock is trading below $9 a share at time of writing. A sustainable rally requires lasting gains to come back and we just haven’t gotten there yet.

That said, the price of stocks often leads changes in earnings. If the cruise company is forecast to experience a jump to profitability, the stock is likely to rally with revenge.

Analysts are currently projecting that the company will return to profitability by fiscal 2023, which is expected to remain profitable even higher in fiscal 2024. If this were to materialize, investors could triple their money in the coming years. as stocks return to the $30 level.

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What prevents Carnival Stock from restarting its dividend?

Let’s use 2019 as the base year for comparison.

Reason 1: Net Losses

Healthy dividends are paid out of earnings. As mentioned above, Carnival is operating at a loss and losing money.

Carnival ended fiscal 2019 with a current ratio (as defined by current assets ÷ current liabilities) of 23%, including $518 million in cash and cash equivalents.

In the last reported quarter at the end of August, its current ratio improved to 65%, including cash and cash equivalents of $8.9 billion. However, you need more liquidity due to your current poor financial situation.

Reason 2: poor financial situation

After operating at a loss for 3 years, Carnival’s financial position has deteriorated significantly. For example, let’s take a look at your debt-to-equity (“D/E”) ratio. In 2019, the D/E of CCL was 0.78%. In the last reported quarter at the end of August, its D/E shot up to 5.2.

One reason is that their debt more than doubled by 2.2x. Another reason is that his losses resulted in his retained earnings falling from more than $26 billion to less than $1.9 billion. Carnival now has a junk S&P credit rating of B.

In fact, investors would argue against even touching Carnival’s bonds, which are lower-risk investments than its common stock. To get an idea of ​​the risk of junk bonds, they currently have a yield of 8.75% to 18.3%, while they were originally issued with coupon rates of 4.0% to 10.5%.

What would it take for Carnival Stock to restart its dividend?

First, you need to generate profit. To make a profit, the macroeconomic environment is required to improve. After that, assuming normalized annual net income of $3 billion, it would take a little over 8 years for your retained earnings to return to base year 2019 levels (when you last paid a healthy dividend).

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If Carnival survives this, it will see credit rating improvements over time. The company’s S&P credit rating was downgraded from investment grade BBB- to BB- in June 2020. Therefore, it likely won’t restart its dividend until it returns to at least an S&P credit rating of BBB-.

Investor Takeaway

Carnival has a long way to go before it can restore its dividend. First, you need to survive this difficult operating environment that was brought on by the coronavirus pandemic. After you start making a profit again, you will steadily improve your financial position.

There is light at the end of the tunnel. Analysts currently expect it to return to profit by fiscal 2023. If so, investors will experience a sharp price appreciation (potentially double or triple) long before its dividend returns.

At this time, Carnival stock remains a highly speculative stock. If you are looking for a safer investment in space, you can consult Booking Holdings Inc. (BKNG), which has an S&P credit rating of A- with a strong earnings rebound this year.

There are even safer investments available after a 20% bear market, including solid stocks that pay good returns. Risk-averse investors may consider defensive sectors such as consumer staples and utilities that offer lower returns but also expose investors to much less risk.

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