Thursday, October 27, 2005
I have been watching recent dividend increases from large corporations for clues they might offer about the company's projections for the year to come. In some respects, we are flying blind with regards to the real strength of the economy and corporate profits because of the disruptions of recent storms. I took a very positive read from Paychex's 23% hike a few weeks ago, because of its implications for employment. Today I take another positive read from Carnival Cruise Lines. This week CCL hiked its dividend 25%. Our dividend discount model was estimating a 13% hike and Value-Line was estimating a 7% increase. Let me see here, let me count the ways that CCL is in the eye of the storm. 1. Many of their main bases of operation are along the coast of the United States; 2. They consume huge quantities of petroleum; 3. They do not sell an essential service, and their customers have to travel long distances to reach them; and 4. They have a terrorist threat because cruise ships are a known target. This does not sound like a recipe for surprisingly good news, but their 25% hike is just that. Again in my judgment, as in the case of Paychex, a 12%-13% hike would have been fine with investors and Wall Street. So, why a 25% dividend hike, unless it says something about next year's business? They know they are in the eye of the storm. They know the aforementioned four points. They go to bed with them every night and wake up with them every morning. I believe the answer to that question is obvious: Come heck or high water they think their business is going to be better in spite of the obstacles than does Wall Street, and in my judgment they are putting their money out to prove it. This kind of dividend talk is priceless, because it is tangible, comes from the source, and, finally, because most people ignore it. We do not own CCL in any of our styles of management, but as a result of this dividend action, we are studying it very closely. We'll comment later on our final decision, but either way, as a signal, CCL's hike is valuable.
Labels: Company Discussion