Inside Wall Street: Gaming stocks that pay out

Strong cash flow may prompt some casinos to offer special dividends by the end of the year.

By Gene Marcial Sep 7, 2012 2:12PM
Image, Gambling, copyright, CorbisCasino stocks are usually not regarded as primarily dividend plays, but with some of them steadily raking in robust free cash flow, they could provide investors with handsome cash returns.


Las Vegas Sands (LVS) and Wynn Resorts (WYNN) are two that fit the bill as attractive cash generators. These two casino stocks are attractive free-cash-flow stories, asserts Rachel Rothman, gaming analyst at Susquehanna Financial Group.

Rothman  is bullish on the two stocks primarily because of their strong financials, which she believes will allow them to return capital to investors through special dividends by the year's end.


"We are bullish on LVS and WYNN given the favorable supply-demand dynamics of the Las Vegas and Asian gaming markets and the potential for (price-earnings) multiple expansion as future growth projects materialize," says Rothman. She notes that despite the recent slowdown in Asian gaming trends, shares of the two companies are "compelling at current levels."


Las Vegas Sands' stock is currently trading at $44.63 a share and Wynn is at $103. Her 12-month price target for LVS is $45 a share, and a significantly heftier goal of $115 for Wynn.   


At Wynn, Chairman and CEO Steve A. Wynn is non-committal about a special dividend, but the "odds that the company will pay a special dividend is good," says Rothman.


Wynn is in the midst of a $3.5 billion to $4 billion buildup of its Wynn Cotai operations in Macau. But the analyst argues that given that the bulk of the spending for Cotai is still a few years away, and the likelihood that the Bush-era tax cuts will expire at year end, "we believe the odds are in favor of another special dividend by year end," says Rothman.


Wynn already pays a yearly regular dividend with an annual 1.9% yield, and has also paid special dividends in five years, at yields ranging between 3.9% and 7.1%.


Analysts see the development of the project on the Cotai strip in Macau as a driver for further growth. "We see Wynn's results benefiting from longer-term growth in its Macau Operations,' says Esther Kwon, analyst at S&P Capital IQ, who rates the stock a buy.  


Las Vegas Sands management set the tone for increased returns of capital to shareholders at its recent New York meeting with analysts by highlighting its shrinking capital expenditures schedule, reduced leverage, and strong free-cash-flow profile.


"Management has indicated publicly a preference for more dividends," notes the analyst.

The company, which began paying quarterly dividends of 25 cents a share (a 2.3% yield) in the first quarter of 2012, doesn't have a history of paying special dividends, Rothman points out, because of a relentless pipeline of growth projects in recent years.


However, because of its cash on hand, strong free cash flow, and the looming dividend tax rate hike, "we believe Las Vegas Sands may pay a special dividend before the year end," she adds. It could potentially pay a special dividend of $2 a share, or a 4.6% yield, says Rothman.


In effect, the dividends, plus the possibly enhanced payment of special payouts, offset the volatility or potential risks in playing the casino stocks. 

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Sep 7, 2012 8:02PM
Rothman is really going out on a limb month target price 45.00 for LVS ?  Give me a break, it will be at least 50.00 in a year.
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