One FTSE 100 4% yielder I'd buy ahead of Carnival plc

carnival cruise ship CCL

Today I'm looking at cruise ship giant Carnival (LSE: CCL) and another stock from the travel and leisure sector.

Carnival -- whose brands include Cunard, P&O Cruises and Princess Cruises -- has reported a full-year adjusted profit of $2.8bn for the year to 30 November, up by 7.6% from $2.6bn a year earlier. Helped by a 4.5% increase in average ticket prices, today's results have come in slightly ahead of consensus forecasts for net earnings of $2.7bn.

Although cancellations caused by hurricanes hit the group's fourth-quarter earnings, management says advance bookings for 2018 are currently ahead of last year "at higher prices".

Shareholders will see their total dividend for the year rise by 18% to $1.60 per share, giving a yield of 2.4%.

A potential bargain?

Carnival shares have lost nearly 10% of their value since hitting all-time highs of more than £54 in the summer. In my view, this weaker sentiment has left the stock looking more attractive than it has done for some time.

Costs excluding fuel are expected to rise by just 1% over the coming year, while revenue is expected to be 2.5% higher, excluding exchange rate effects. The mid-point of the firm's 2018 guidance is for adjusted earnings to rise by 8.6% to $4.15 per share, putting the stock on a forecast P/E of about 16.

Analysts expect a dividend increase of 10% in 2018, giving a forecast yield of about 2.6%.

Demand for cruise holidays shows no sign of slowing. In my view Carnival remains a good way to play this sector, a view shared by my colleague Paul Summers. But personally I'm more attracted to a stock with a slightly broader focus.

This could be a better buy

My preferred travel sector stock is German group TUI AG (LSE: TUI), whose businesses include Thomson, TUI Cruises and six airlines, 300 hotels and tour operators in a number of northern European countries.

I think TUI's diversity and scale gives the group an advantage when handling shifts in consumer demand. Although the businesses all appear to be separate enterprises from a customer's perspective, they are able to benefit from centralised buying and planning. This allows the group to balance supply and demand for different types of holiday and, hopefully, generate consistent profits in changing market conditions.

This certainly seems to have worked in recent years. Profits from continuing operations rose by 95% to EUR910.9m last year. Interestingly, TUI's return on capital employed (ROCE) has been stable at 9%-11% since at least 2012, giving an average of 9.8%.  In contrast, Carnival's ROCE has varied between 4% and 10% over the same period, giving an average of only 6.5%.

Strong finances

TUI reduced its average net debt last year from EUR970m to EUR526m, giving a net debt-to-EBITDA ratio of just 0.35. That's very low indeed, and suggests to me that cost control and cash generation are both strong.

This financial strength allows the group to pay out a greater share of earnings as dividends. TUI's shares are also more modestly valued than those of Carnival and currently trade on a forecast P/E of 13.9, with a prospective yield of 4.3%. I see this as an attractive entry point.

5 FTSE 100 dividends I'd buy

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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