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Miami-based Carnival Corporation (CCL - Analyst Report) recently announced the decision to re-establish its share repurchase authorization of up to $ 1 billion. Since the beginning of fiscal 2013, the world’s largest cruise operator, repurchased 2 million shares worth $78 million under its Sep 2007 $1 billion share buyback program. Carnival has so far bought back total shares worth $835 million under its 2007 program.  

Apart from expanding the share repurchase program, the company declared a quarterly dividend of 25 cents per share, payable on Mar 15, 2013 to shareholders of record as on Feb 22. In Nov 2012, the cruise operator also approved a special dividend of 50 cents per share in anticipation of a dividend tax rate increase in 2013.

We appreciate Carnival’s effort to bolster long-term shareholder value. We believe that the share repurchase authorization affirms the company’s positive outlook and reflects its confidence in its fundamentals.

At the same time, the share buyback will help the company reduce the outstanding share count, thereby increasing earnings per share and return on equity. Apart from bolstering shareholder value, this strategic move lifts the relatively undervalued share price.

At the end of 2012, the company had cash and cash equivalents of $465 million, long-term debt of $7.2 billion and shareholder equity of $23.9 billion. On the financial front, Carnival boasts a very low debt-equity ratio.

For fiscal 2013, Carnival expects strong free cash flow generation of $1.3 billion (up from about $667.0 million generated in 2012), which the company is expected to return to shareholders. This would lead to a total return of more than $3.5 billion to shareholders, over a three-year period from 2011 to 2013.       

Carnival plans to reduce its capacity growth in the coming years. This will lead to low capital expenditure and thereby enable the company generate substantial free cash flow to fund share buybacks and dividend distribution.     

Carnival currently carries a Zacks Rank #3 (Hold). Other stocks from consumer discretionary sector are currently performing well include Melco Crown Entertainment Ltd (MPEL - Snapshot Report) Las Vegas Sands Corp. (LVS - Analyst Report) and International Game Technology (IGT - Analyst Report). While Melco carries a Zacks Rank #1 (Strong Buy), Las Vegas Sands and International Game Technology carry a Zacks Rank #2 (Buy) stock.

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