Financial Jungle

I used to think that since it was a capital intensive business, Carnival (CCL) wouldn’t qualify as a classical dividend growth story, but I stand corrected.

Carnival is the most dominating global cruise company in the world generating revenues in excess of $13 billion; trouncing the $6 billion eked out by distant second place, Royal Caribbean. The company didn’t become this big for no good reason: it has the most recognizable brand and the fattest profit margin (17.5%) in the cruise line business. For comparison, Royal Caribbean’s profit margin is only a meager 9.8%.

Carnival is also spinning out lots of cash, and it’s not afraid to share the wealth with investors. In 2007, the Miami-based company garnered an astonishing $4.07 billion of cash from business operations. Out of which, only $0.54 billion was needed for ship improvements/refurbishments, and developments to various tour assets and port facilities.

With $3.53 billion of free cash flow in hand, Carnival chose to reward shareholders with $990 million in dividends and buy back $275 million worth of shares. They reinvested the rest of $2.26 billion as part of the ongoing new shipbuilding program, including final delivery payments on 5 brand-new ships: Carnival Freedom, Emerald Princess, AIDAdiva, Costa Serena and Queen Victoria. (Carnival owned 85 ships by end of 2007.)

This 36-year old company delivered its first dividend payment of 2.5 cents a share back in February 1989. Today, the quarterly dividend balloons to 40 cents a share. In fact, payments have accelerated in recent years quadrupling over the past 8 years.

Carnival is about 20% off its high. I haven’t pinned down an entry price, but at 4% yield, less than 25% payout ratio based on free cash flow, 13.5 PE ratio, and a good growth profile, I think a reasonable entry price is near.

I don’t own the stock. I’m not a certified investment adviser. Please conduct your own research.