Royal Caribbean (NYSE:RCL) and its cruise operator peers are among the case studies in business model vulnerability to pandemics, a trait making the 57% one-month gain for RCL stock appear misleading.
That’s a big rally in a short time frame for a stock that’s been bludgeoned by the novel coronavirus outbreak. Not only does it lead to some debate regarding whether or not the easy money has already been made here, but it elicits concern about exactly what’s backstopping this rally. That foundation revolves around expectations that pre-coronavirus life will rapidly reemerge as the pandemic fades.
Those expectations are being fueled by chatter from some companies that the present will be the worst for the U.S. economy and things will start to perk up in the back half of 2020. As it pertains to Royal Caribbean and any other cruise line for that matter, those aren’t the companies expecting big rebounds in the second half.
In fact, it could be the fourth quarter before ships set sail again, meaning Royal Carribeans and its water-borne ilk — including Carnival (NYSE:CCL) and Norwegian Cruise Line Holdings (NYSE:NCLH) — could go roughly half of this year operating in a near-zero revenue environment.
Brand Equity Matters
For those looking to be bullish on a cruise name or those daring enough to wait out the industry’s trials and tribulations, Royal Caribbean is the name to do it with, though that doesn’t mean it should be atop investors’ buy lists. That said, it has strong brand equity and that could be meaningful on the industry’s path to redemption.
“Not only do we believe RCL is the best positioned from a liquidity standpoint, but we also believe as cruising starts to resume, its brand quality and unique itinerary structures (CocoCay, China, etc.) could benefit the company more than its peers,” said Stifel analyst Steven Wieczynski in a recent client note.
Speaking of liquidity, Royal Carribean has some — seven months worth to be precise, assuming cash burn of $441 million per month and a zero-revenue climate persist. The need to conserve cash, prevalent across the industry, brings up another point: the sustainability of Royal Caribbean’s dividend.
Currently yielding 6.49%, the stock is undeniably tempting on that basis, but the payout is also undeniably vulnerable to a cut or suspension. Based on its 192.84 million shares outstanding and annual payout of $3.12 a share, Royal Caribbean would save nearly $602 million if it went a year without paying the dividend. Looked at another way, by scrapping the payout today, the company buys itself roughly another 45 days of life in a no-revenue setting.
Cutting or eliminating a dividend is a tough call for any executive team to make, but if it’s a matter of extending solvency, it’s an easy decision and in the case of Royal Caribbean, investors should treat the payout as anything but dependable.
Bottom Line on RCL Stock
Much of the case for RCL stock revolves around investors’ personalities. What I mean is if an investor is considering this name for a quick 10%-15% on the back of reopening economies leading to a second-half rebound, then half it. That’s an attainable goal.
However, for those thinking Royal Caribbean can get back to its prior high of $135, there are myriad challenges to that idea, not the least of which is the time it takes for the cruise industry to return to 2019 capacity levels.
As Stifel’s Wieczynski noted, Royal Caribbean could operate at 75% of 2019’s capacity levels in 2021 and 2022 and it could be 2024 before the cruise industry looks like its 2019 self again. That’s a long time to wait, particularly if the company says good-bye to its dividend.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.