Earlier this year I wrote about the island capital markets (“Investment Opportunities in the islands” — March 19, 2019) highlighting what were in my opinion the best investments closer to home. In scanning the offshore world, my conclusion was that the preferred stock of Bermuda-based reinsurance companies would be a good place to make a return.
Indeed, that strategy has been a good choice. A basket of Bermuda-based preferreds achieved a total return of 17.5 per cent for the first half of 2019. This return includes stock dividend yields of between 5 and 7 per cent in addition to price appreciation across the board. Representative securities include issues backed by Arch Capital Group, Axis Capital and RenaissanceRe Holdings.
Fixed-income securities, including preferred stock issues appreciate in price when interest rates decline and since the beginning of the year, the ten-year US Treasury bond yield has fallen from 2.68 per cent to about 2 per cent. But after the recent price surge, prefs may have run their course for now.
For another island opportunity, look no further than the cruise ship industry. While the three main players are headquartered in the US, their travel routes span throughout the Caribbean and Bermuda in addition to many other parts around the world. According to government reports, Bermuda hosted approximately 168 cruise ships and 476,000 passengers in 2018. The numbers are expected to increase by 14 per cent this year according to the Bermuda’s Department of Marine & Ports Services. The majority of the large ships are registered in the Bahamas for tax and regulatory reasons.
Due to the capital-intensive nature of the business, the cruise industry operates as a classic oligopoly and pricing generally remains firm as high costs discourage new entrants. Carnival Cruise Lines (CCL), Royal Caribbean (RCL) and Norwegian Cruise Lines (NCLH) dominate the sector. Carnival, which has a dual stock listing in both New York and London, is the largest of the three with more than 100 ships in service, while Royal Caribbean Cruises Ltd is the second largest with approximately 40 ships. Combined, the two companies control about three-fourths of the global cruise ship market, but almost half of all cruises in the world are booked through Carnival and its subsidiaries.
Weakness in Europe and president Trump’s recent decision to pull the plug on Cuba as a port of call for Americans have knocked the stocks down as the broader market hits new highs. Some analysts have downgraded the sector in recent weeks as earnings are guided lower, but longer-term investors should consider this entry point.
Amid the wreckage, a good choice for income-oriented investors is Carnival Cruise Lines (ticker CCL), paying a dividend of 4.3 per cent which they have increased at an average rate of 14.8 per cent over the past five years. CCL shares are currently priced around $46 per share, trading near a four-year low.
Carnival operates under nine global brands and has more than one hundred ships on the ocean. Altogether, the company has passenger capacity of more than 200,000 allowing it to reach a wide group of consumers in a lightly penetrated vacation segment.
Less than 4 per cent of the population has ever cruised but the market is expanding as baby boomers age. Carnival benefits from its efficient scale with the lowest unit costs in the industry in addition to valuable brand assets.
The second largest company, Royal Caribbean has less exposure to the softening European market and therefore has suffered a smaller price decline. Royal pays a dividend of 2.5 per cent, lower than Carnival but the company has raised its payout at a faster average annual rate of 22.8 per cent over the past five years. RCL is acknowledged as a savvy operator with its leader, Richard Fain recently selected by Barron’s magazine as one of the top 30 CEOs in the world.
With Europe still in the doldrums, it may take some time before bookings in the region begin to normalise, however, the fallout from the Cuba ban appears manageable. Analysts believe Royal Caribbean will take a one-time earnings hit of about 3 per cent against its prior $9.65-$9.85 full-year guidance for Cuba. However, the company expects bookings to be fully remedied by the first half of 2020.
Finding income plays in a yield-starved world is a current challenge, but the cruise companies look like solid longer-term income and growth plays for those willing to navigate some choppy waters in the near term.
Bryan Dooley, CFA, is the senior portfolio manager and general manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.