Royal Caribbean Could Soar With Recent Growth in Cruising

The key to successful investing is to take the long view and block out the daily noise. That's particularly true when it comes to the cruise line industry, which continues to grow, despite concerns about the safety of international travel.

Last year, for example, the world's floating vacation villas welcomed 23 million passengers, up from 15 million in 2006. That figure will jump to 24 million this year, according to the Cruise Lines International Association.

The main country driving that growth: China, where the ballooning middle class is increasingly eager to cruise its cares away. Between 2012 and 2014, the number of Chinese passengers rose at a 79% annual rate, according to the China Cruise and Yacht Industry Association.

"Chinese cruise tourists will most probably surpass one million in 2015," said Zheng Weihang, the association's vice-president, in a January Maritime Executive article. "I expect this number to reach 2.5 million by the year 2020, 4.5 million by 2025 and seven million by 2030."

One of the first international cruise companies to establish itself in China was Royal Caribbean Cruises (RCL) , the world's largest cruise operator. Royal Caribbean has 47 ships and nine more on order.

The company is now diverting some of its newest ships to the east, including the 4,200-passenger Quantum of the Seas, which started sailing out of Shanghai year-round in 2015. This year, the company will bring its Chinese fleet to five when it adds the new 4,180-passenger Ovation of the Seas.

To be sure, the cruise industry can be highly volatile. For example, passenger growth slowed, following the sinking of the Costa Concordia in 2012 and the power outage that left the Carnival Triumph dead in the water in the Gulf of Mexico in 2013.

But the industry has rebounded from those woes, and aside from strong prospects in China, it can look forward to continued growth in mature markets like the U.S., where just 24% of the population has taken a cruise.

Higher passenger numbers and a jump in onboard spending propelled Royal Caribbean to a 5.6% year-over-year revenue increase in the first quarter, to $1.92 billion, matching the consensus forecast. Earnings per share more than doubled, to $0.46, and were well ahead of the $0.31 analysts expected.

The Brussels terrorist attacks hurt the company's Mediterranean business, but that meant that North Americans stayed closer to home, buying Royal Caribbean's cruise packages in Alaska, Bermuda and the Caribbean, instead.

Meanwhile, Royal Caribbean is an under-appreciated income play: the $0.375 quarterly dividend yields 1.9% on an annualized basis. But if you look beyond that below-average yield, you'll see a tidal wave of dividend growth: In the last four years, RCL has boosted the payout by 150%.

The dividend should keep rising with Royal Caribbean's profits. In its last earnings report, the company upped its full-year EPS guidance from $6.15 to $6.35 for 2016, which would be an increase of 27% to 32% from 2015. The average analyst estimate calls for EPS to jump to $7.21 in 2017.

Along with the higher earnings comes a higher share price -- or at least the expectation of one. The average 12-month price target on the stock sits at $99.50, nearly 30% higher than today's finish.

Royal Caribbean trades at just 12.6 times the $6.25 a share analysts expect it to earn this year, the same as Norwegian Cruise Lines Holdings but a discount compared to Carnival at 14.8.

So if you're looking to dip a toe in the cruise industry, grab some Royal Caribbean shares now.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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