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Gaming stocks have suffered a brutal decline this year, due to rising fears over the fate of gaming activity in Macau, a special administrative region of China.
Macau is a key geographic market for casinos, because of its consumers’ robust desire for gambling. However, the Chinese government is cracking down on gambling activity, and casino revenue is falling sharply as a result.
This has caused stock prices to drop, and those companies that pay dividends are seeing their dividend yields rise. For example, Las Vegas Sands (NYSE: LVS) has suffered a 33% drop in share price from its 52-week high. That has pushed its dividend yield above 6%.
Normally, a declining stock price and an elevated dividend yield are signs of trouble, perhaps indicating a deteriorating business. At times, that leads to a devastating dividend cut. But for what it’s worth, Las Vegas Sands’ management has repeatedly reiterated its commitment to the dividend.
Diversified Model Helps
The good news is that Las Vegas Sands is not completely reliant on the traditional casino business model, nor is it entirely dependent on Macau. To be sure, Macau is very important – it’s the only part of China where casinos are legal.
And Las Vegas Sands’ EBITDA (earnings before interest, taxes, depreciation and amortization) at Sands China fell 29% last quarter, year-over-year. Total revenue declined 19% last quarter, largely because of Macau.
However, the company points to its integrated model as reason to be optimistic. Las Vegas Sands operates what it calls a MICE model, which stands for meetings, incentives, conferences and exhibitions. The company generates revenue from a variety of sources, not just casino gaming.
For example, the company holds a large retail mall format in Asia that allows it to branch out beyond just gaming. Overall mall revenue is up 15% through the first half of the year. However, that is the only business that has posted revenue growth over the first six months.
A Risky Dividend Stock Wager
CEO Sheldon Adelson remains extremely confident in the business, as well as its ability to pay dividends. In Las Vegas Sands’ most recent conference call with analysts, he said:
“Let me be clear, we remain committed to the maintenance of our generously recurring dividend programs and we remain committed to increasing those recurring dividends in the future as our cash flow grows.”
The bad news is that the math does not support such a high level of optimism. Over the first two quarters of 2015, Las Vegas Sands generated $862 million of free cash flow. Unfortunately, this was not enough to cover its dividend payments in that time, which totaled $1.3 billion. The company also utilized $65 million in share buybacks in the six-month period.
As the saying goes, numbers don’t lie. Conditions in Macau need to bottom and steadily improve from here if the company is to continue paying its generous dividend. So far, Las Vegas Sands has been able to fill the gap between free cash flow and its cash returns by issuing debt. Through the first six months, proceeds from long-term debt issues totaled $1.4 billion, which allowed the company to fund its cash returns. This cannot last forever.
Just as gamblers place a wager at the roulette table, Las Vegas Sands’ dividend is a risky bet. The company is not covering its dividend and share buybacks with free cash flow, which is resulting in a cash drain. The company burned through $687 million of cash and equivalents over the first half of the year.
While Las Vegas Sands might be a risky wager, the editors at High Yield Wealth have uncovered a stable of safe dividend stocks that are unlikely to go bust. Click here for all the details.