Time to sell this sinking FTSE 100 dividend stock?

Paul Summers questions whether it’s time for him to abandon one of the FTSE 100 (INDEXFTSE:UKX) stocks he holds.

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In addition to the loss of human life (which is undoubtedly the most important and tragic consequence of the outbreak), the coronavirus has also caused strife for many London-listed companies with a global presence. An example is cruise line operator Carnival (LSE: CCL) — a stock I began buying last year.

Seen purely from an investment perspective, should I and other holders jump ship? I’m inclined to say no.

Negative publicity

Admittedly, the last month or so hasn’t been great for the FTSE 100 behemoth. Aside from being caught up in the general sell-off of travel-related stocks, Carnival has had to contend with an outbreak of the virus on one of its ships — the Diamond Princess — which remains moored in Japan.

To make matters worse, it’s emerged that a passenger on another of the company’s ships, the Westerdam, tested positive after it docked in Cambodia and people were permitted to disembark, raising concerns that the virus will now spread throughout Asia. This has led to lots of sensationalist headlines describing cruise ships as “floating Petri dishes“.

A hit to profits is odds-on. Indeed, Carnival already declared on February 12 that its decision to suspend operations in Asia to the end of April would impact earnings by between $0.55 and $0.65 per share. Of course, the actual figure could turn out to be even worse if this is extended. 

So, why do I think investors should keep calm and carry on?

Long-term horizon

First, things like the coronavirus are ‘known unknowns’ (we accept there’s a possibility they will happen, we just don’t know when or how much damage they will do). This, combined with the fact that Carnival’s shares were hardly expensive before news of the coronavirus broke, may lead the market to be more forgiving of poor numbers when they are announced. Having lost almost 20% in value since mid-January, there’s a chance that the worst might already be over. 

Second, while emerging economies are likely to be a source of growth for Carnival going forward, they currently account for only a very small proportion of its passengers. Again, purely as an investor, I’d be more concerned if the outbreak originated in the US — its largest market.  

Third, although Carnival’s status as the industry leader makes it an easy target during tough times, it arguably also makes it the best horse to back when positive sentiment returns. History suggests operators tend to bounce back strongly in the year following virus outbreaks. Just as rare air disasters haven’t stopped people flying, nor will health crises on ships stop people from cruising.   

Finally, there’s the argument that the dividends on offer compensate for any ongoing underperformance of the stock. A predicted 203 cents per share (157p) cash return in 2020 leaves the company yielding 5.2% right now. 

Granted, there can be no guarantees and things could conceivably go from bad to worse if the virus isn’t contained. Being a holder of the stock also makes it more likely that my view of Carnival is clouded by bias.

At times like these, however, I think it’s best to recall the Fool UK’s philosophy of investing in companies with great long-term potential. Things could stay choppy for a while, but focusing on the horizon (and less on the short-term behaviour of Carnival’s share price) should make things easier.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares of Carnival. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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