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Carnival Corporation (CCL - Analyst Report), the world’s largest cruise operator, has decided to reward its shareholders with a special dividend. We believe this decision was mainly based on the impending threat of a dividend tax increase in 2013 due to ‘Fiscal Cliff’.

The board of directors approved a special dividend of 50 cents per share on top of its regular quarterly dividend of 25 cents. The special dividend equates to a 1.3% yield at current levels and will be paid on December 28, 2012 to shareholders of record as on December 7, 2012.

Moreover, with cash and cash equivalents of $568.0 million as of August 31, 2012, the company is in a strong position to reward its shareholders.

Carnival remains committed to shareholders’ value enhancement both through dividend distribution and share repurchase. During the third quarter of 2012, the company repurchased 2 million shares for $67 million. As of September 24, 2012, the company had $265 million remaining on its existing share repurchase authorization. Moreover, sluggish industry capacity growth in the coming years will result in low capital expenditure and enable the company generate substantial free cash flow to fund share buybacks and dividend distribution.

Other companies like Las Vegas Sands Corp (LVS - Analyst Report) and Tyson Foods Inc. (TSN - Analyst Report) had also announced special dividends in anticipation of a dividend tax rate increase in 2013.

Carnival is the largest and historically the most profitable cruise operator in the world. The company’s cruise brands are well diversified across geographic regions and are strategically positioned at various price points within the larger North American cruise market. This enables it to cater to the needs and demands of passengers in various geographic regions, as well as within the contemporary, premium and luxury cruise segments.

Carnival’s Costa brand has recovered from the grounding of its ship in January and has now started to perform better, benefiting from the marketing initiatives taken by the company. Costa's occupancies and booking volumes across all itineraries have improved compared with last year, but prices still remain at a low level.  Management expects the brands to swing back to profitability in 2013, once the Costa Concordia incident is lapped. Starting from the second quarter of 2013, Carnival expects Costa’s revenue yields to increase on easy year-over-year comparison.

Moreover, since June, the company has registered stronger fleet wide booking volumes and pricing trends for the fourth quarter of 2012 as well as the first half of 2013. Bookings and pricing in North America for the first half of 2013 have been trending higher since mid-August this year. This indicates that the company is catching up on bookings at a higher price point. Additionally, management expects to see year-over-year increases in both North America and EAA revenue yields in the second quarter of 2013 based on easy comparison. Carnival is also committed to its cost-control initiatives as well as its target to expand in the Asian market.

However, the sluggish European economy that led to uncertain consumer confidence in Europe, adverse currency translations and higher overall unit costs excluding fuel in 2013, pose major threats to the company. Hence, Carnival currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term ‘Neutral’ recommendation on the stock.
 

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