Some businesses are like a slow-motion shipwreck. Even before last Friday's cruise ship disaster, Carnival Corp. (CCL) itself was a giant, leaky vessel. Both sailors and old salts in the financial markets know that it is better to be lucky than smart. But when it comes to sailing and investing, it is also a good idea not to embark on a long voyage on a ship that is leaking from the start.
For the fiscal years ending in 2008, 2009, and 2010, cash flow from operations for Carnival was $3.391 billion, $3.342 billion, and $3.818 billion, respectively. Capital expenditures for those same years were $3.353 billion, $3.380 billion, and $3.579 billion, respectively. In other words, Carnival had negligible free cash flow, relative to the large market cap of the company. And this was when the seas were calm and the skies clear.
Like many asset-intensive businesses, Carnival has always been forced to reinvest the bulk of its cash flow right back into the business. In this sense, it is a true "sinkhole stock" -- or for that matter, a boat: a hole in the water surrounded by wood into which one must pour money. Even over the last 10 years, Carnival has produced meager free cash flow ($1.56 billion), and has been forced to fund the bulk of its share buybacks and dividends from net debt issuance ($2.155 billion).
Royal Caribbean (RCL) is an even bigger shipwreck. Over the past 10 years, the business has been a true incinerator of cash (-$3.557 billion free cash flow). Royal Caribbean has added $4.851 billion to its debt load over those same 10 years. Of this $4.851 billion of cash infused by debt-holders, $3.557 billion has gone into the incinerator, $220 million to share buybacks at inflated prices, and $873 million in dividends.
It's a very strange transfer of wealth, if you think about it: Soak the bond-holders and starve the shareholders so that people around the world can take very nice subsidized cruises. Better to book the cruise than buy the stock. This is something that Buffett and Munger figured out many years ago:
We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year, and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year.
-- Charlie Munger, Berkshire Hathaway 2008 Annual Meeting Notes