How My Vacation Led Me To My Latest Pick

Nathan Slaughter's picture

Monday, December 17, 2018 - 12:00am

by Nathan Slaughter

Don't overpack. Book your shore excursions early. Ask your room steward for extra ice.

Of all the helpful tips shared by the online community before our first family cruise, there was an important one nobody mentioned: Don't let your teenage kids spend too much time in the video game arcade with a room key that is linked to your credit card.


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I learned that lesson the hard way. Still, it didn't diminish the experience. In fact, we have since become avid cruise enthusiasts and sailed on all the major lines.

Cruising is the swiftest growing segment in the leisure travel market. The number of passengers boarding a ship has increased 60% globally over the past decade to 25 million last year. Incidentally, that represents an occupancy rate above 100%, meaning not only are empty cabins few and far between, but many are holding more than the standard two guests per night.

This has been the case for years, which is why new ships are always being built -- adding capacity that is quickly absorbed.

In fact, global passenger volume is expected to top 27 million this year. Keep in mind, each passenger spends an average of $213 per day or $1,491 for a standard seven-day voyage. But here's what excites me even more... Less than 5% of the North American population has ever set foot on a cruise ship -- meaning 19 out of every 20 people haven't yet been reached.

That's a huge, untapped market for these floating dividend factories.

Something For Everyone
Over the years, I've learned to put some distance between my personal interests and my investments. It's important to remember that our own likes (or dislikes) don't always make (or break) an investment candidate. That being said, there are times when the two intersect beautifully.

My most recent Daily Paycheck pick is another that I can endorse both personally and professionally. But I'm writing this as an investment analyst, not a travel agent. I'm not trying to sell you on a cruise, but  I also can't make the bullish case without explaining some of the newer features -- after all, that's what is attracting record numbers of passengers.

Today's redesigned vessels are so rich in amenities that some even choose not to disembark when in port. They offer something for everyone -- whether it's the peace and serenity of a spa or the raw adrenaline of zip lines. Discriminating travelers looking for fine cuisine, luxurious accommodations and white-glove service can still find it, even as some of their fellow passengers are more interested in poolside revelry and late-night parties.

The regimented itineraries of the past where passengers are told where and when to dine are also largely gone. And if you think entertainment options are limited to shuffleboard and bingo, think again. Most larger ships offer attractions such as poolside movies, miniature golf courses, ice skating rinks, rock-climbing walls, laser tag arenas and headline shows that rival the best of Las Vegas.

If those aren't to your liking, each new day brings a full slate of activities... cooking classes, art auctions, music trivia, wine tastings. That diversity is why cruises have become so popular for multi-generational trips, allowing parents and grandparents to go one way and kids the other. (Millennials are coming aboard in record numbers, by the way.)

To maximize economies of scale, these floating cities are getting larger and larger. Launched last month, Royal Caribbean's new Symphony of the Seas stretches nearly 1,200 feet from bow to stern. While it can easily accommodate up to 6,600 passengers and 2,200 crew members, the vessel contains seven distinct "neighborhoods" and rarely feels crowded.

Of course, cruising isn't for everyone. Cost is the most frequently cited concern, but keep in mind that this all-inclusive package includes your lodging, meals, transportation and entertainment. Even then, it's not too hard to find trips that run less than $50 per person per day.

The only real inhibiting factor is the lack of available cabins.

Investing In Growth
As I mentioned, demand has outstripped supply, leading to occupancy rates above 100%. That's why fifteen new ships and 45,000 lower berths were added to the global fleet in the last two years. Today, there are 314 ocean-going vessels (river cruising is counted separately) with the ability to hold 537,000 passengers.

To accommodate future demand, shipyards are busier than ever. Approximately 85 new vessels will make their debut between 2018 and 2025, ranging from mass-market leviathans to opulent sightseeing ships.

And I can tell you firsthand that once passengers board, operators are skilled at coaxing more money out of them. It's not unusual to spend more at the bars, casinos, gift shops and shore excursion desks than on tickets. For investors, this spending is conveniently captured and monitored in a key industry metric called revenues per available lower berth day (ALBD), or, similarly, revenues per available passenger cruise day (APCD).

Royal Caribbean, for instance, generated $2.8 billion in revenues last quarter and had an available capacity of 9.9 million passenger cruise days (double occupancy per cabin multiplied by the number of cabins multiplied by the number of cruise days). That means it earns about $282 per APCD, versus $240 a decade ago.

With rising yields per passenger, you can see why management is keen to get more passengers at sea. But occupancy is currently 111.9%. That's why the company plans to spend $4.7 billion on new ships this year to increase 2019 capacity by 8.6%.

And it's not alone. Analysts are expecting Walt Disney (NYSE: DIS) to pump $24 billion into its cruise line and theme parks over the next five years. For context, that's more than it paid for Marvel, Pixar and the Star Wars franchise combined.

And that brings us to another reason why I love this industry. Ordinarily, strong growth and returns on capital would attract competition. But that's not an issue here -- considering the immense capital needed. The MSC Splendida cost approximately $550 million to build. And Royal Caribbean's newest Oasis-class ships have a price tag of $1.4 billion.

Few can afford to build and operate a single cruise ship -- let alone an entire fleet. So there is a tall barrier to entry shutting out potential competition, concentrating 90% of the domestic profits among a tight oligopoly of incumbents.

Investors would be wise to take a look at the whole group of cruise operators. Of course, I have my favorite: it has the lowest per-person costs and the highest dividend yield. And that's why I made it my most recent addition to The Daily Paycheck.

If you'd like to learn more about my premium service, and get your hands on this pick, simply go here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.