Over the past 12 months, shares of Las Vegas Sands (LVS) have lagged the market by over 40%. LVS is not alone however, with shares of competitors such as Caesar’s (CZR), MGM (MGM), and Wynn (WYNN) also severely declining.
This precipitous decline has helped push LVS’ dividend up to historical highs of >4%. Can investors rely on this in the future?
The business
LVS is one of the biggest gambling companies in the world, with properties primarily in Macau, Singapore and Las Vegas. 80% of its revenue and earnings are actually from Asia and not Las Vegas, with the majority of those Asian revenues generated in Macau.
Major risk is slowdown in Macau
The crackdown on corruption has crippled the VIP revenues from high rollers. This has hurt all casino operators in the region across the board.
While these revenue drops are concerning, the mass-market sales are actually higher margin given the casinos don’t need to give as heavy discounts, promotions, or rebates to common visitors. That said, movement in the mass market (which is less impacted by anti-corruption regulations), is of a larger importance to LVS.
Even before the corruption crackdown, VIP earnings were contributing a smaller and smaller portion of operating income.
This mass-market has some strong growth tailwinds that should help drive revenues and profits. Chiefly, 200 million Chinese are expected to travel outside of China by 2020, compared to 83 million in 2012 and 97 million in 2013.
While there may be fluctuations in per capita spending, an overall increasing number of visitors should be the primary metric in driving higher profitability in the area. So far, visitation numbers haven’t slowed as much as the revenue drops would suggest.
Valuation
While LVS can mitigate the recent negative headwinds, they are by no means immune. Many major Wall Street firms are skeptical of their ability to navigate current conditions. Overall, Credit Suisse has a gloomy outlook for the big four U.S.-listed Macau casino operators, including Las Vegas Sands.
This perception can be seen across consensus estimates which have been reduced significantly and consistently over the past 90 days.
Still, long-term estimates are for ~9.5% annual growth, albeit quite below the historical pace.
Even using depressed EPS estimates for this year’s base and the reduced long-term growth estimates of 9.5%, GuruFocus’ DCF tool has LVS shares at roughly fairly valued.
In terms of the dividend, LVS may get away with avoiding an outright cut. The company recently maintained its $0.65 per share quarterly dividend but conserved cash flow by not doing any share repurchases during Q1 2015. Previously, the lowest amount of shares it repurchased during a full quarter since its stock repurchase plan started in June 2013 was 3.1 million shares in Q4 2013.
Even at this year's depressed EPS estimates of $2.73, LVS would still cover the dividend. It looks like Las Vegas Sands is intent on maintaining its dividend for now, although the dividend may be funded partly via debt (such as the recent $1 billion term loan) if EPS continues to decline.
For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
