To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
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So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Carnival (LSE: CCL) (NYSE: CCL.US), the word’s largest cruise ship operator.
With the shares at 2585p, Carnival’s market cap. is £4,745 million on the London market, although the firm also has a dual-listed structure with a further listing on the New York Stock Exchange.
This table summarises the firm’s recent financial record:
| Year to November | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue ($m) | 14,646 | 13,460 | 14,469 | 15,793 | 15,382 |
| Net cash from operations (£m) | 3,391 | 3,342 | 3,818 | 3,766 | 2,999 |
| Adjusted earnings per share (cents) | 296 | 227 | 251 | 242 | 188 |
| Dividend per share | 160 | 0 | 40 | 100 | 100 |
Carnival owns most of the world’s best known cruise brands such as Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, P&O Cruises and Cunard. Maintaining its fleet of over 100 ships makes for quite a capital-intensive business, which seems to reflect in the company’s debt-burden.
Looking at the figures, it’s easy to spot the effects of the cyclical nature of the firm’s holiday business, particularly in the dividend record. Events like last year’s Costa Concordia disaster are clearly unhelpful contributors to Carnival’s marketing footprint, although insurance covered most costs.
I think the long-term share-price chart informs on the prospects for capital appreciation – the share price is roughly where it was nine years ago. Meanwhile, at a trailing 2.6 or so, the dividend yield is unexciting. I’m very cautious on Carnival’s total-return prospects.
Carnival’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: adjusted earnings covered last year’s dividend around 1.9 times. 3/5
2. Borrowings: net debt is around 5.6 times the level of operating profit. 1/5
3. Growth: recently fallen cash flow and earnings results from flat-looking revenue. 1/5
4. Price to earnings: a trailing 21 or so seems to overstate growth and yield expectations. 2/5
5. Outlook: flat recent trading and a cautious outlook. 3/5
Overall, I score Carnival 10 out of 25, which makes me cautious about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Although earnings provide decent dividend cover, Carnival scores low on my quality and valuation indicators. Therefore, I’m unlikely to invest.
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> Kevin does not own shares in Carnival.
