The gaming industry may not be the first place you would look for dividend stocks, but it has some surprisingly strong dividends right now. Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), and Melco Resorts (NASDAQ: MLCO) all have strong cash flows and solid dividend yields for investors.
What's changed most about gaming stocks in the past decade is that they are no longer highly leveraged companies. Instead of needing to borrow billions of dollars to expand year after year, there's so much money in the industry that they can pay dividends that look sustainable for the foreseeable future.
A view of the Las Vegas Strip. Image source: Getty Images.
The gaming cash machine
The biggest investment gaming companies make is building resorts, which can often add up to billions of dollars. From a cash flow perspective, after a resort is built the business should generate cash consistently over the long term; companies get in trouble when those cash flows aren't large enough to cover the debt taken out to build their resorts. But that's not a big risk today.
Below is a chart of the EBITDA, or earnings before interest, taxes, depreciation, and amortization, of Las Vegas Sands, Wynn Resorts, and Melco Resorts. This is a proxy for the cash flow a resort is generating before factoring in financing costs.
If you compare EBITDA to the total interest expenses these companies are paying, you can see that there's ample cash being generated to pay dividends, buy back stock, and grow into new markets.
Growth is hard to come by
Growth may seem like the logical use for cash in gaming, and traditionally that's been true. From the 1980s to 2000s, gaming companies would use any excess cash to fund growth projects in Las Vegas, regional U.S. markets, and Macau. But most of those opportunities have dried up.
Las Vegas hasn't seen a major new resort open since The Cosmopolitan of Las Vegas opened in 2010. Gaming revenue has been fairly stagnant in Las Vegas, so there hasn't been an incentive to expand, allowing companies to pour cash flow into existing properties.
Macau just finished a wave of construction, which included The Parisian from Las Vegas Sands, Studio City from Melco Resorts, and Wynn Palace from Wynn Resorts. These new resorts have added to the cash flow coming into their respective companies, and haven't stretched their balance sheets so far that they can't afford to pay dividends. But there are few growth opportunities in Macau going forward, because the government limits the number of resorts that can be built in the region.
Of these three companies, Wynn Resorts has the only major expansion underway with its Encore Boston Harbor project, a $2.5 billion resort that is expected to open in summer of 2019. Other than that, most cash generated by this business can be used to return money to shareholders.
Room to grow already strong dividends
Current dividend yields for Las Vegas Sands, Wynn Resorts, and Melco Resorts are 4.6%, 2%, and 2.4% respectively. But you can see below that these companies are generating more in EBITDA than they're paying in dividends, meaning there's ample room to grow dividends without stressing the balance sheet.
The nature of the gaming business entails high cash flow once resorts are built, which makes them perfect dividend stocks for investors. Las Vegas Sands is the high-yield dividend stock among this group, and as the biggest company, it's also the safest bet right now. Wynn Resorts has a lower dividend yield but a lot of growth ahead as Wynn Palace ramps up and Encore Boston Harbor open. Melco Resorts has a more variable dividend, because it pays dividends based on how much net income it makes. Depending on your investing goals, each has a role in a dividend portfolio today.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- 3 Stocks That Are Absurdly Cheap Right Now
- 5 Warren Buffett Principles to Remember in a Volatile Stock Market
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- The Must-Read Trump Quote on Social Security
- 10 Reasons Why I'm Selling All of My Apple Stock