Seeking Alpha
Dividend growth investing, long-term horizon, value, growth
Profile| Send Message|
( followers)  

The casino business has been a profitable venture over the last several years as Las Vegas has rebounded from the woes of the "Great Recession", Macau in China has grown into the gaming center of the Far East and cash hungry states in the United States have looked to increase revenues by expanding legalized gambling.

While some of the stocks in the sector have missed out on these opportunities and have had share prices flounder, others have taken advantage of the rebound and begun rewarding shareholders with increasing dividend payouts. In this article I will focus on those companies in the gaming sector that pay regular dividends and try to determine if they are worthy as a long term dividend growth investment. The four companies currently paying regular dividends are Ameristar Casinos (NASDAQ:ASCA), Churchill Downs Inc. (NASDAQ:CHDN), Las Vegas Sands Corp. (NYSE:LVS) and Wynn Resorts Ltd. (NASDAQ:WYNN).

Company Backgrounds

Ameristar Casinos Inc. develops, owns and operates casinos and related facilities throughout the United States. However, in December of 2012, Ameristar entered a preliminary buyout agreement with Pinnacle Entertainment (NYSE:PNK). As a result of the uncertainty surrounding this proposed merger, and the lack of a dividend payout by the future parent company, Ameristar will not be analyzed any further as a dividend income investment with this article.

Churchill Downs Inc. provides horse-racing, casino gaming and entertainment services in the United States. It has gaming operations in Mississippi, Louisiana and Florida and has racing operations in Kentucky, Illinois, Florida and Louisiana. The company also offers online account wagering for horse-racing events and through investments engages in manufacturing and operating wagering systems for racetracks and other pari-mutuel wagering businesses.

Las Vegas Sands develops, owns and operates casino resorts in Asia and the United States. It owns and operates The Venetian Macao Resort Hotel, the Four Seasons Hotel Macao, the Plaza Casino, the Sands Macau and Sands Cotai Central in Macau, China. It owns and operates the Marina Bay Sands in Singapore and The Venetian Resort Hotel Casino, the Palazzo Resort Hotel Casino and the Sands Expo and Convention Center in Las Nevada as well as the Sands Casino Resort Bethlehem in Bethlehem, Pennsylvania.

Wynn Resorts is based in Las Vegas, Nevada and develops, owns and operates destination casino resorts in Las Vegas and Macau. It owns the Wynn Las Vegas and Encore at Wynn Las Vegas in the United States and the Wynn Macau and Encore at Wynn Macau located in China.

Earnings Comparison

The first items to be analyzed are the earnings, growth rate and analyst projections for the prospective companies. This information was collected from Yahoo Finance and Charles Schwab.

CompanyTickerPriceEPSPE Ratio5YR EPS GrowthForward 5YR EPS Growth
Churchill Downs Inc.CHDN$ 71.39$ 3.3421.422.2%6.5%
Las Vegas Sands Corp.LVS$ 53.41$ 1.8528.941.3%12.1%
Wynn Resorts Ltd.WYNN$ 128.40$ 4.8226.621.7%10.9%

Based on the earnings and growth rate, the three companies are all trading at fairly similar valuations. The three companies sport trailing PE ratios above 20 with projected earnings growth between 6.5% and 12.1%, which seems a tad high for the expected growth.

The estimated 5 year EPS growth rates for Sands and Wynn are nearly twice those for Churchill Downs, which tends to support the higher PE ratios for those companies.

Debt/Performance Comparison

Next we will take a look at the debt load of these companies as well as the efficiency of the businesses based on Return on Equity and Net Profit Margin.

CompanyTickerCashDebtMarket CapDebt / Market CapProfit MarginReturn on Equity
Churchill Downs Inc.CHDN$37.18M$215.8M$1.18B0.188.0%9.5%
Las Vegas Sands Corp.LVS$2.51B$10.23B$44.9B0.2713.7%20.8%
Wynn Resorts Ltd.WYNN$1.86B$5.79B$12.3B0.479.7%62.6%

As you can see from the table, Las Vegas Sands holds considerably more debt on the books than Churchill Downs and Wynn Resorts. However, when comparing the debt to the market cap of the companies, Sands actually has a lower ratio than Wynn, while Churchill Downs has the lowest of the three with a ratio of just 0.18.

Las Vegas Sands has the highest profit margin of the group while Wynn significantly outperforms with a return on equity of nearly 63%.

Dividend Analysis

TickerPriceDividendYieldPayout Ratio "EPS"Levered Free Cash Flow/SharePayout Ratio "FCF"1YR Dividend Increase
CHDN$ 71.39$ 0.721.0%22%$ 6.4611%20%
LVS$ 53.41$ 1.402.6%76%$ 1.20117%40%
WYNN$ 128.40$ 4.003.1%83%$ 6.3064%100%

In analyzing the dividend, Wynn Resorts outperforms in the two main categories by having the highest yield and dividend growth of the group. Meanwhile, Churchill Downs has the lowest payout ratios based on EPS and FCF, which likely means their dividend is the "safest" of the group. The ratios for both Wynn and Las Vegas Sands are both considered very high as they are paying out over 75% of earnings and in Las Vegas Sand's case over 110% of levered free cash flow.

Special Dividends

Another aspect that must be considered with the dividend analysis of these companies is the long history of Wynn Resorts and more recent history of Las Vegas Sands in paying a special dividend every December. Here is a table showing historical dividends paid by the companies since the regular quarterly dividend was established by Wynn in 2010.

YearCHDNLVSWYNN
Q1 2013$ -$ 0.35$ 1.00
Q4 2012$ 0.72$ 3.00$ 8.00
Q3 2012$ -$ 0.25$ 0.50
Q2 2012$ -$ 0.25$ 0.50
Q1 2012$ -$ 0.25$ 0.50
Q4 2011$ 0.60$ -$ 5.00
Q3 2011$ -$ -$ 0.50
Q2 2011$ -$ -$ 0.50
Q1 2011$ -$ -$ 0.50
Q4 2010$ 0.50$ -$ 8.00
Q3 2010$ -$ -$ 0.25
Q2 2010$ -$ -$ 0.25

As you can see, over the last 3 years Wynn has averaged $6.58 per year in special dividends above the regular quarterly rate. Meanwhile, Las Vegas Sands instituted the regular dividend in 2012 and paid out a special $2.75 dividend in December and Churchill Downs has not paid any special dividends.

Taking these average special dividends into account for Wynn and Las Vegas Sands boosts their annual yields by an additional 5% at the current share prices, on top of the regular 3.1% and 2.6% dividends being paid.

Conclusion

As you can see in the chart below (with "Great Recession" shadowed) the gaming sector was hit hard by the financial crisis and corresponding cut in discretionary spending. However, as Macau has emerged as a gaming power in the Far East and Las Vegas has recovered, the stocks have rebounded and are again on an upward trend.

CHDN Chart

CHDN data by YCharts

While these companies may not be as risky as a weekend of gambling in Vegas, they have shown to be highly affected by the economy and may not be suitable as a dividend investment for those nearing retirement. But for those looking for decent yields who are willing to add some higher risk bets to their portfolio, these stocks may be worth gambling on for income.

Source: Gambling For Income: Gaming Sector Breakdown For Dividend Investors