“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