“Dividend Income Opportunities This Strong Don’t Pop Up Often…”

By Travis Johnson, Stock Gumshoe, April 15, 2015

That’s the headline of a recent ad from Tony Sagami for the Yield Shark newsletter that he now runs for Mauldin Economics — Sagami has been around for awhile as a newsletter pundit, mostly focused on Asian stocks over the years as he has teased stocks for newsletters like The Asian Century and Asia Stock Alert. He also ran the Disruptors and Dominators newsletter over at Weiss for a little while before it was handed over to Frank Curzio a few months back.

So does he have special insight into casinos, or into dividend stocks? I don’t know — of the teaser picks he’s touted in the past for a variety of letters, the winners have mostly been biotech stocks and the losers have mostly been resource stocks. For recent years, that pretty much puts him in the company of every other newsletter editor who writes about those two topics — no other market has been as hot as biotech or as cold as mining in the last few years.

But let’s see which dividend-paying gambling stock he’s teasing, shall we? Here’s how the ad opens:

“Las Vegas Strip casinos, for example, did $6.4 billion in gaming revenue last year. Clark County, Nevada as a whole—pretty much the entire Las Vegas metropolitan area—did $9.4 billion in gaming revenue.

“But impressive as that is, it’s still only 1/6th the gaming revenue of just SIX casinos in the biggest gambling hotspot on earth. Today you can get a piece of the pie from the best and most luxurious of those six casinos, AND collect a 4.4% dividend.

“As you probably guessed, I’m talking about casinos in Macau. Macau is… well, Macau is Las Vegas on steroids. 410 million people live within a 5-hour flight of Las Vegas. 2.2 billion people live within 5 hours of Macau—almost 1 out of every 3 people on earth.

“If Las Vegas is vacationers stuffing quarters into slot machines with robotic efficiency, Macau is newly wealthy Chinese standing 8-deep at a table, itching to throw down stacks of bills.”

Have you noticed that pretty much all of the casino stocks have been clobbered recently? That’s most of the reason why I thought this ad was worth discussing and exploring today — the short history of macau-related stocks has been one of tremendous booms and busts, and the volatility is often caused by regulatory concerns… as with last year’s crackdown on corruption that had crooked Chinese bureaucrats avoiding Macau (and the attention that flashing their cash around the tables might bring), and, just this week, with regional officials hinting that they might have to cut traffic to Macau because the little island just can’t handle any more.

If you ask me (no one ever does), they need to put Disney in charge — if anyone can figure out how to squeeze an extra million people into a tiny space, it’s the masterminds behind Disney World.

But anyway, the concern is weighing heavy on Macau stocks now because there is a huge building boom continuing in that area, with lots of new casinos going up from pretty much all the existing casino owners (and at least one big new player) … and because the pundits are all turning negative on Macau because gaming dollar volume has continued to drop this year, and because they’re afraid the billions being invested in new properties will be competing for a smaller and smaller user base.

Which means, of course, that though most of the casino operators are pretty good companies — with experienced operators, and the ability to cut costs and manage OK when revenues fall — they’re all very much subject to exactly the same regulatory risk. If there is no growth in visitors to Macau, they suffer. If there is no growth in gambling revenue overall, they suffer. Pundits are anticipating that things will continue to look fairly bleak on those fronts, so they’re selling and most of the stocks are now well off of their highs of about a year ago.

So that’s the backdrop — most of the Macau-related casino stocks are now back down close to where they were about two years ago. Which one does Tony Sagami like here? Let’s check the clues from the ad:

“Macau is the future of gaming—of luxury consumption by the jet-set crowd—and the company I recently recommended to my Yield Shark readers has a property in Macau that’s widely agreed to be the best and most luxurious. It has plans to open another. And it has a strong footprint in Las Vegas….

“… it already derives 71% of its revenue from Macau and the rest from Las Vegas….

“Shares are relatively cheap, analysts have returned to a bullish outlook for Macau going forward after the inconsequential blip in 2014, and the company sports a trailing 12 months’ diluted earnings per share over $8. Only two years ago, the company was just shy of $5.

“This company is essentially printing money—and it pays that fat 4.4% dividend. It has also paid $9.00 in special dividends over the past several years.”

And he says that the occupancy rates for casinos are a key metric, which makes this “secret” company look even better:

“… this company is majestically unbeatable when it comes to occupancy. Currently, this company sports a 98.5% occupancy rate at its property in Macau. Last year, it was 95.8%. This is why taking the step of opening another property makes perfect sense.”

So which one is it? This is, sez the Thinkolator, Wynn Resorts (WYNN)

Which does indeed get most of its revenue from Macau, with the rest from the Wynn and Encore properties on the Las Vegas strip. Though there are dreams of diversifying a bit further with a Wynn casino just outside of Boston at some point in the next few years (they won the Casino license for Eastern Mass after our state decided to award four casino licenses a couple years ago, and they have a new design that looks just like their other swoopy gold casino towers (as opposed to their original design, which, like the Philadelphia casino they planned but dropped a couple years ago, looked kind of like the Mirage tower in Las Vegas — Wynn built the Mirage as the first luxury “spectacle” hotel in Las Vegas 25 years ago). So it looks like the two Las Vegas hotels and the two Macau hotels will be joined by one in suburban Boston, perhaps, and, much sooner than that, by their third Macau casino called the Wynn Palace.

And news has, as you might gather, not been particularly good lately — Sagami’s numbers come from the third quarter report last Fall, the fourth quarter announced in February was considerably worse… and also came with another delay for the Wynn Palace opening, now pushed back into sometime in the first half of 2016 because of a worker shortage (they didn’t get as many permits for workers as they asked for — like the tourists, pretty much all the construction labor in Macau needs to be imported). Since the “new” casino always gets the buzz and the full hotel, whether that’s in Las Vegas or on the Cotai Strip in Macau, there’s some worry that their big new casino (and the new Parisian from the much larger Las Vegas Sands (LVS)) will be delayed even further… giving perhaps an opening to the other new casinos/expansions expected to be opened this year by Galaxy and Melco Crown.

So there’s definite concern at WYNN for three major reasons: Growth potential in Macau may forever be harmed because of lower VIP visitor growth in the wake of China’s corruption crackdown and the associated regulatory scrutiny over the “capital flight” from China through Macau; Macau “visitor caps” might depress the lower-market visitors who had been making up for last year’s lower VIP numbers; and, assuming that those two concerns don’t continue to worsen (revenue has fallen pretty steadily for about a year now for Wynn in Macau), there’s also the risk associated with delays in opening Wynn’s new Macau Palace casino.

And to cap it all off, there’s also a proxy fight ongoing — but that’s largely about whether Wynn’s ex-wife, a major shareholder, gets to stay on the board. I don’t imagine the result will have a meaningful impact on their financial results.

Because this is a fairly small company in terms of number of properties — just four open casinos — they arguably have more regulatory risk than larger companies like Las Vegas Sands (LVS), which is bigger in Las Vegas than Wynn is but also has a large Singapore resort, but that means a big opening in Macau or Boston could certainly have a substantial impact on the bottom line.

They do still pull in a lot of money every year, as befits a business that exists primarily to sell adrenaline for cash, but there continue to be consistent reports in the press about institutional investors selling Wynn shares, and of pundits and analysts downgrading them (here, here and here if you want a few recent examples). And there are some folks who are thinking that the beatdown Wynn has gotten is making them more attractive, too — like Frank Curzio, who recently said he finds the beaten-down dividends of both WYNN and LVS appealing.

The special dividends have shrunk over the years, which I suppose should not be surprising given the costs of expansion, but they did pay a special dividend last year as they have in the previous few years — so the dividend could be well over 5% instead of the 4.3% indicated by the current $6/share annual rate at the current dividend level (they’ve also raised the regular dividend a few times in recent years). My personal guess is that the second shoe hasn’t dropped yet regarding the Chinese trying to squash over-expansion in Macau, but that’s really a wild guess and shouldn’t mean anything to you.

Certainly there have been a couple times in the past when “what will China do” concerns (or debt problems, as in the financial crisis) have beaten down the shares of the Macau operators, and they’ve bounced back well after those dips… so if you think we’re close to the bottom of that dip it might be worth watching these guys — as you can probably tell, I don’t have a lot of conviction.

If you want something crazier and far more speculative, the stock that gets talked up every now and then as a play on the “mass market luxury” (ie, deca-millionaires, not hundred-millionaires… and not any tourist looky-loos) is the Louis XIII casino/hotel (0577.HK, LOUIF OTC in the US) that’s being built in Macau now, the one that ordered up a fleet of Rolls Royces to ferry their conspicuous consumer clientele around. If you think China’s full of hot air, and that the VIPs will soon have their heads out of the foxholes and start throwing money around again, that 2016ish construction story might catch fire. That one’s much more of a pure play on VIPs and the “Macau bounce back,” and they’re borrowing tons of money to build their ritzy casino, so it might implode… but kind of fun to watch. WYNN is also probably more “high end” than LVS in Macau, and more capacity-constrained with their hotel rooms before the Palace, so maybe they’ll have pent up demand if the market recovers and their new hotel opens on time next year, too. We’ll see, it’s all wildly speculative right now and it’s certainly scaring some investors away… but really, a casino stock should be a gamble, even if it pays a nice dividend.


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12 Comments on "“Dividend Income Opportunities This Strong Don’t Pop Up Often…”"

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Tony
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Why “gamble” on WYNN when I get a similar yield out of a nice, safe utility?

Charles
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What utilities do you like currently?

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wkho noze
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agood utility to consider wud be nisource NI tthey r spinning off as a dvnd stock in a mlp

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George Martin
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Great detective work, Travis!
Any validity to the Angelnexus claim of “Gold’s Doubling Effect”?

Dave C
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I dont know about Macau but in NV gaming regulations allow for management to change the pauout ratio of the slots from the control center upstairs. There is suppose to be a certain amount of downtime before the ratio is converted. I think its 5 min.? Those machines are designed to pay money and casino are scrambling to find away to make some. New regulation may help. Look at the El dorado (ERI nas) fresh out of BK, merge with MTR and already a triple in just two yrs. They probably not making a momey but one of the fee… Read more »
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Stick
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Subscribed to Yield Shark pre-Sagami. Lousy performance.

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Charles
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I would not bet (haha), on casinos in Macao or anywhere that depends heavily on Chinese “Jet Setters”, at the moment.
Following the news on the anti corruption campaign in China, a lot of those jet setters are more likely to be setting in prison than at the blackjack table in the years to come.
Same with high end luxury items like Louis Vuitton, who have depended heavily on Chinese big spenders….
Beware.

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pjwa
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You can also buy the stock in Hong Kong, Wynn Macau (1128), which represents just the Macau interests. It is yielding about 10% currently, though the year end dividend of HK$1.05 was called a ‘special’ dividend, rather than final. Not sure why. There is some inconsistency in the dividend profile; total payout is up on year when earnings dropped, but actual yield as per the record, ex-special, is sharply down. Anti-graft is set to continue in China, which will prolong the difficulties for Macau and high-end brands, and my golf club membership, which I had planned to surrender until I… Read more »
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bluesharpbob
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Talk about timing, interesting article in yesterday’s NY Times concerning Wynn Resorts management-
http://www.nytimes.com/2015/04/15/business/dealbook/fight-over-wynn-resorts-overshadows-question-of-management.html

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Harley
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I recently picked up shares under $125.00 hoping to hit bottom however as mentioned in article there is a wild card, ” And to cap it all off, there’s also a proxy fight ongoing — but that’s largely about whether Wynn’s ex-wife, a major shareholder, gets to stay on the board. I don’t imagine the result will have a meaningful impact on their financial results.”
I am worried that Elaine Wynn who owns 9.4% of the company, just behind her ex-husband, who owns 9.9% and she says she wants to be able to sell her shares without restrictions.

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