Royal Caribbean Cruises (NYSE:RCL) might escape bankruptcy despite its heavy debt load. That sentiment has been pushing RCL stock higher in the last week or so. But without a dividend payment and buybacks, the stock might have a limited upside.
On April 21, Royal Caribbean signed an amendment to its existing debts in order to take advantage of a 12-month debt holiday. This initiative was offered by one of the company’s European creditors in order to finance the company’s build-out of its ship, Quantum of the Seas.
Royal Caribbean announced this amendment on April 24 in an 8-K filing. Here is what the company said about the dividend prohibition:
In the event we take certain actions while the Deferred Tranche is outstanding, we will be required to prepay the outstanding balance of the Deferred Tranche. These actions include the payment of dividends, the repurchase of stock, and the issuance of debt or equity other than for liquidity. These restrictions are subject to customary carveouts such as, in the case of new debt, debt incurred to finance new ships.
This prohibition will last at least a year, or until the debt deferred is paid off.
Why No Dividends Will Hurt RCL Stock
Most people assume that RCL has a 7.90% dividend yield when they look up the stock on any website that shows the stock price. The company has not announced yet that it is going to defer the payment of any dividend. So without reading the recent 8-K filing, they are not aware that the stock won’t pay its dividend.
For example, on March 23, Royal Caribbean signed a $2.2 billion loan agreement with a number of Wall Street banks. But if you read the 8-K filing for that agreement, it shows that the company can actually continue paying a dividend, but cannot increase the dividend rate.
Up until April 24, everyone thought that Royal Caribbean would pay its dividend. Royal Caribbean paid its most recent quarterly dividend on April 6, but it was declared on Feb. 20. Again, theoretically, the company is not due to declare another dividend until May 20 or so.
There are bound to be some upset investors who don’t quite yet realize the dividend is now zero. The company will likely clarify this when it announces its first-quarter earnings in early May.
Barron’s recently reported that Royal Caribbean was likely to suspend its dividend. This is because Carnival (NYSE:CCL) has recently done this, and cruise companies are likely to do everything to conserve cash right now. Royal Caribbean was likely to follow suit.
What to Do With Royal Caribbean?
The truth is that RCL stock is very risky. There is no margin of safety with this stock. It is deeply indebted and its outlook is very unclear. The CEO for Norwegian Cruise Lines (NYSE:NCLH) said on April 28 that he expects the travel industry will survive.
This helped push up all the cruise industry stocks. But, be careful, because without a dividend to help soften the pain, RCK stock is not as attractive.
For example, if Royal Caribbean could cut its dividend in half to $1.56 per share, RCL stock would yield 3.75%. That would go a long way to buttressing the stock here on in. In addition, it would save the company $301 million annually.
But the banks funding the deferral holiday for its latest ship don’t want to see any dividends paid. RCL shareholders are going to have to live with this. It may be a rough ride for them if it takes longer for cruise travel to pick back up.
Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial. As of this writing, he did not hold a position in any of the aforementioned securities.