The FTSE 100 index has been in fine form so far in 2019 but that’s not to say all of its constituents have been in demand.
One out-of-favour stock I’ve been unable to resist adding to my portfolio this month has been cruise operator Carnival (LSE: CCL). Here’s why.
1. Growing demand
If you think cruise holidays are just for people of a certain age, think again. While it’s true that increasingly active retirees still make up the majority of those taking to the seas, there are signs that younger generations, driven by the desire for Instagrammable experiences over possessions, are keen to get in on the act.
According to Cruise Lines International Association (the industry’s largest trade association), “the appeal of multiple destinations and unique experiences, such as music festivals at sea“, is attracting more and more members of Generation Z — those born between 1995 and 2010 — to become cruisers.
But increasing popularity across the age range is just one source of future growth. Rising wealth in emerging economies such as China is likely to be a boon for operators like Carnival going forward.
As things stand only 2.4m of its population take cruises, far below the near-12m from the US. That could all change over the next decade or so.
2. Dominant position
Carnival is the largest cruise operator by some margin.
Through its 10 brands (including P&O, Princess and Cunard) and a fleet of over 100 ships, it boasts a market share of roughly 50% — double US-listed rival Royal Caribbean’s slice of the cruising pie. Its proportion of global passenger capacity looks likely to climb even higher over the next few years with the launch of several new ships.
If, like star fund manager Terry Smith, you’re looking for companies that have “already won” the race to be the best in their respective industries, Carnival surely ticks the box.
3. Going cheap
Despite the encouraging outlook for the industry, anyone unfortunate enough to buy the shares at their all-time high back in August 2017 would now find their position under water by around 35%. Given ongoing geo-political events, that’s not altogether unexpected.
The most recent ‘big fall’ came last month after the company reduced its profit forecast for the full year as a result of the US government’s decision to ban cruises to Cuba, a dip in demand in Europe and mechanical problems with the Carnival Vista ship.
Things could remain choppy for a while. In the meantime, Carnival’s stock changes hands at just 10 times forward earnings. Its average P/E over the last five years has been 18.
If you subscribe to the belief that stocks revert to the mean over time, the £24bn cap could be a great buy at these levels.
4. Decent dividends
It may not boast the biggest payouts in the FTSE 100, but Carnival certainly isn’t stingy when it comes to returning cash to holders. The divided has been hiked by double-digits in each of the last four years.
Analysts have pencilled in a $2.01 per share for the current financial year, giving a yield of around 4.6% at the current share price.
While it’s never wise to depend on a single stock for income, the fact that it’s predicted to be covered over twice by profits does imply that Carnival’s payout is a lot more secure than others in the top division.
