Carnival's Dividend Safety Score Downgraded to Unsafe as Cruise Demand Outlook Dims Further
On February 25, we downgraded Carnival's (CCL) Dividend Safety Score to Borderline Safe. Our full note here is worth reading for more background on Carnival's situation, but in our conclusion, we wrote:
Cruise demand will take a hit for some period of time, but barring a major setback, Carnival appears to have the financial strength necessary to ride out the storm for a while...
With that said, a prolonged slump in cruise demand would sap Carnival's cash flow during a period of peak investment, resulting in poor dividend coverage for several years.
While Carnival's long-term outlook would likely remain intact, the high level of uncertainty facing management could cause the dividend to come under pressure out of financial conservatism...
Conservative income investors who are comfortable owning a cyclical cruise operator may be better served by waiting for more evidence that the coronavirus is not becoming a global pandemic.
As feared, the coronavirus has only continued to spread since our note was published, pulling Carnival's stock price down more than 40% in the process.
The first case of coronavirus in the U.S., where Carnival derives over half of its bookings, wasn't announced until a day after we published our note. Today, more than 700 U.S. cases are confirmed, rattling many Americans' travel plans.
Another blow was dealt to the industry this past Sunday, when the U.S. Department of State advised that U.S. citizens "should not travel by cruise ship."
The Centers for Disease Control and Prevention (CDC) also recently warned that COVID-19 "appears to spread more easily between people in close quarters aboard ships."
Simply put, the outlook for cruise demand has taken another step down since our February 25th note and seems likely to remain weaker for longer as travelers take even more precautions in response to the spreading coronavirus.
Given this unprecedented level of demand uncertainty and the cash flow drain it will cause as Carnival's inflexible newbuild schedule peaks, a dividend cut would not be surprising. We are therefore downgrading Carnival's Dividend Safety Score to Unsafe.
As we discussed in our note last month, Carnival's current predicament shares many similarities with the situation it faced in 2008 when management suspended the dividend.
An argument can still be made that Carnival's long-term outlook remains largely unchanged and its overall financial health is not a concern, but conservative investors seeking safe income should remain on the sidelines.
