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Dividend Analysis of Amusement Park Stocks
Posted by: Vinay Singh (IP Logged)
Date: May 31, 2014 09:49PM
When I was a kid some of my favorite video games involved building and managing amusement parks. I played Theme Park on the Sega Genesis and later Roller Coaster Tycoon on the PC, both classics. Of course, these games make the business seem easier than it really is. It's a volatile industry which isn't exactly recession-proof, and many amusement park operators had a rough time during the recent financial crisis and the recession which followed.
But now, as the economy is slowly but surely getting stronger, amusement park operators are doing a lot better. Crowds are bigger, people are spending more, and profits are flowing. And as it turns out, these companies are returning much of these profits to shareholders in the form of dividends. Pure play Six Flags (SIX) pays a 4.63% dividend, while competitor Cedar Fair (FUN) pays an astonishing 5.88% dividend. Disney (DIS), which derives much of its profits from its media holdings and not its parks, pays a far lower 1.15% dividend.
Quite a comeback
Even before the financial crisis Six Flags wasn't in great shape, partially due to a large amount of debt and the subsequent interest expense. The company was forced to declare bankruptcy in 2009, emerging in 2010 with a more manageable level of debt. Since then the stock has soared, rising from around $16 per share in 2010 to $77 per share today.
The reason for the stock performance is simple - the company started making money. At the end of 2008 Six Flags had nearly $2.4 billion in debt, resulting in annual interest payments of $179 million. Interest ate up about 17.5% of the total revenue and completely wiped out any operating profits. After the bankruptcy the debt levels dropped, now just $1.4 billion, and annual interest payments have plummeted to around $65 million.
This cleaner balance sheet led to a profit in 2011 and a much bigger profit in 2012. The company has about $1 billion of net operating loss carry-forward, meaning that taxes for the next five years will be minimal. In 2012, after adjusting for a large tax benefit, the company recorded about $3.85 in EPS. The company, using a modified calculation, puts its cash EPS at $4.50, and they project this number to grow to $6 per share by 2015.
Along with the reduction of interest payments these earnings were driven by a reduction in operating expenses. From 2009 to 2012 cash operating costs as a percentage of revenue dropped from 75.6% to 61.2%. This has allowed the company to use its new-found cash flow to buy back its own shares. In 2012 the company bought back $232 million worth of its shares, and in the first quarter of 2013 bought back an additional $375 million of shares.
After initiating a small dividend in 2011 the company has drastically raised that dividend twice, first to $0.60 per quarter per share in 2012 and now to $0.90 per quarter per share. This puts the yield at 4.63%. The payout ratio, based on the company's cash EPS number, is high at 80%. But if cash EPS grows to $6 by 2015 as the company projected an 80% payout ratio would yield a annual dividend of $4.80 per share, 33% higher than today.
It's hard to say what the dividend growth trajectory will be, but the company seems focused on creating shareholder value. The share buybacks will lower the payout ratio, creating more room to grow the dividend. And with a high barrier to entry in the North American amusement park industry I expect Six Flags to continue to generate ample excess cash. With a high yield and reasonable growth prospects, Six Flags looks like a nice high-yield dividend stock.
An even higher yield
Cedar Fair owns 11 amusement parks, five water parks, and five hotels. This compares to Six Flag's 18 amusement parks. Cedar Fair does about $1 billion in annual revenue, similar to Six Flags, but its market capitalization is 50% lower.
This year Cedar Fair raised its dividend by over 50% to $0.625 per quarter per share, putting the projected dividend yield at an eye-popping 5.88%. Cedar Fair has performed better than Six Flags financially over the past decade, with positive EPS every year except 2007 and 2010. EPS in 2012 was $1.81, but the free cash flow was far higher at $3.39 per share.
Cedar Fair is sitting on about $1.6 billion in debt, on which it paid $111 million in interest in 2012. This is nearly twice as much in interest payments compared to Six Flags on roughly the same level of debt.
The total dividend payment in 2013 will be about $140 million, which is 74% of 2012 free cash flow. Like Six Flags, this is quite high. One thing to note is that this dividend payment is higher than the free cash flow of any year from 2008 to 2011.
Because of this, I'm a little concerned about the sustainability of the dividend. A smaller dividend increase than the 50% increase earlier this year would have been more prudent, with the excess cash going towards paying down the debt. I think that Six Flag's dividend may be a bit safer.
But if you're looking for a super-high yield Cedar Fair has your number. Mind you, a single bad year will likely require a dividend cut, and there's no money left over for a buyback program. But yields this high are few and far between.
Not a dividend stock at all
Although Disney operates extremely popular amusement parks this makes up a small part of the company's revenue and profits. Disney is not really a dividend stock, with a yield of just 1.15%, but the company has much brighter growth prospects than either Six Flags or Cedar Fair due to its diversified nature. Disney owns ESPN, ABC, Marvel Studios, and recently bought Lucasfilms. With new Star Wars films in the pipeline, along with more comic-book films in the future, Disney is laying the foundation for years of strong growth.
Disney does buy back a lot of its own shares, spending three times as much on this as the dividend in fiscal 2012. So the capacity for a higher dividend is there, but right now the company seems to prefer share buybacks. Disney could conceivable become a solid dividend stock in the future, but if you're looking for income Six Flags is the better choice.
The bottom line
After a bankruptcy which put the company on a better footing Six Flags is now in a financial position to sustainably pay a lucrative dividend. Cedar Fair offers a higher dividend yield but seems a bit more precarious. Both company's still have quite a bit of debt, and this along with the interest payments need to be watched. But as high-yield stocks, both Six Flags and Cedar Fair look like good choices.
Stocks Discussed: FUN, SIX, DIS,