Updated on May 21st, 2020 by Bob Ciura
As the saying goes, the house always wins. Casinos operate strong business models, as casinos earn a virtually guaranteed profit from the sum of the bets they receive. The relatively attractive economics of casinos make the industry worthy of a closer look.
Investors may be particularly intrigued by the earnings growth and dividends of the major casino stocks. The 4 major publicly-traded casino stocks all pay dividends to shareholders, but they are far from the safest dividend stocks around.
If you are looking for a safer basket of dividend growth stocks, consider the Dividend Aristocrats. They are an elite group of 66 stocks with 25+ years of rising dividends.
You can download an Excel spreadsheet of all 66 Dividend Aristocrats (with important financial metrics such as dividend yields, P/E ratios, and dividend payout ratios) by clicking the link below:
Casinos are not without a fair amount of risk. Casinos are highly vulnerable to recessions, as consumers typically cut back heavily on gaming when the economy enters a downturn. The four major casino stocks saw their earnings collapse during the Great Recession. A similar impact has taken place to start 2020 due to the coronavirus crisis, which caused nationwide lockdowns and has battered the casino industry.
We have analyzed the major casino stocks in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation to compute expected total returns. In this article, we will compare the expected 5-year total annual returns of the four major casino stocks.
Table Of Contents
For this article, stocks are ranked in order of least attractive to most attractive. While 5-year expected returns are incorporated in the rankings, we have also utilized a qualitative screen based on balance sheet strength and overall business quality.
You can instantly jump to a particular section of the article using the links below:
- Casino Industry Overview
- Wynn Resorts (WYNN)
- MGM Resorts (MGM)
- Melco Resorts (MLCO)
- Las Vegas Sands (LVS)
Casino Industry Overview
The casino industry is in severe distress right now. Fears of the spreading coronavirus and the possibility of a global recession have taken their toll on the casino stocks. The large U.S. casinos are heavily reliant on Macau, the largest gaming market in the world and the only market in China where casinos are legal. As a result, these stocks are very sensitive to any developments that affect the gaming activity in Macau.
This was a significant concern several years ago. In 2014, China initiated an anti-corruption regulatory crackdown, which greatly reduced the gaming activity in the area. Fortunately for the casinos, the downturn lasted for approximately two years and gaming activity in Macau recovered thereafter. Then the gaming activity in Macau faced another headwind, namely the trade war between the U.S. and China.
This headwind lasted for only about a year but now Macau is facing its strongest challenge ever, the outbreak of coronavirus, which has caused a huge hit in the gaming business. Casinos were shut down for an extended period due to the coronavirus. Visa restrictions have also added to the decline in gaming activity in Macau.
As a result, gross gaming revenue in Macau plunged 96.8% in April. Gross gaming revenue in Macau has declined 68.7% year-to-date, with analysts expecting a 40%-60% drop for 2020. The high sensitivity of casino stocks to all the developments related to China and their pronounced cyclicality means that investors should pick casino stocks carefully.
Top Casino Stock #4: Wynn Resorts (WYNN)
Wynn Resorts owns and operates Wynn Macau and the Wynn Palace in Macau, as well as Wynn Las Vegas and Encore in Las Vegas. It generates ~74% of its revenues in Macau. Since Wynn Resorts is highly leveraged to the gaming activity in Macau, it saw its earnings collapse and it cut its dividend by 62% in 2015-2016 due to the Macau downturn that was caused by the anti-corruption regulatory crackdown in the area. But as Macau strongly recovered in the last three years, Wynn Resorts returned to growth.
Unfortunately, the company is now facing the headwind of coronavirus in all the regions in which it operates. As mentioned above, gross gaming revenue in Macau plunged in April. Wynn Resorts burnt cash at a rate of $2.6 million per day for every day its Macau operations were closed and is still burning cash in the area due to the suppressed activity. In addition, Wynn Resorts just shut down its Wynn Las Vegas and Encore properties on the Las Vegas Strip as part of the measures against the spread of coronavirus.
Wynn Resorts released first quarter earnings results on 5/6/2020. The company lost $3.54 per share in the quarter, missing estimates by $1.68. Revenue declined more than 42% to $953.7 million, though this was $54 million better than expected. Adjusted property EBITDA was loss of $5.3 million compared to estimates of $206 million. This was also a severe decline from adjusted EBITDA of $495 million from the first quarter of 2019.
Results for Wynn Resorts were significantly impacted by the COVID-19 pandemic as properties in both Macau and Las Vegas were closed for part of the first quarter. Wynn Palace revenues were down 64.3% and the occupancy rate fell to 41.6%. Revenues for Wynn Macau were lower by 56.2%. Las Vegas revenues decreased 19.3% year-over-year as all operations were closed to the public starting 3/17/2020.
The company had additional expense of $56.4 million as it will pay salary, tips and benefits for all U.S. employees through 5/15/2020. Wynn Resorts suspended its dividend in an effort to conserve capital. Consensus estimates call for a loss of $0.60 for 2020.
On the bright side, casinos are gradually reopening, and Wynn Resorts seems to have ample room to grow in the upcoming years thanks to its promising growth pipeline.
Source: Investor Presentation
The company has made progress in the design of Crystal Pavilion in Macau, which will be a major tourist attraction. In addition, Encore Boston Harbor opened in June-2019 and has exhibited strong performance so far so it has promising growth prospects ahead thanks to expected ramp-up in activity.
Moreover, the company has been caught off guard, with net debt of nearly $10 billion, which is greater than the $9.5 billion current market cap of the stock. Therefore, the stock is carrying an increased amount of risk right now due to its high level of debt.
However, we believe that the coronavirus crisis will not last beyond this year and we view the long-term growth prospects of the company as intact. We expect 4% annual EPS growth through 2025. Using the company’s current assets, return on assets of 5.6% over the last decade and share count, we believe Wynn Resorts has earnings power of $1.79. We will use this figure to calculate fair value and projected return.
Based off of the earnings power estimate for 2020, the stock is currently trading at a P/E ratio of 47, which is higher than its historical average of 30.1. However, the stock traded at abnormally high P/E ratios in some years due to depressed earnings in those years.
For instance, the abnormally rich valuation of the stock during 2015-2017 resulted from the market’s view that the downturn in Macau was temporary. Our target P/E ratio of 18 reflects uncertainty regarding Macau and the coronavirus. If shares reverted to our target P/E by 2025, then valuation would be a 16% headwind to annual returns over this time period.
If the stock reaches our fair valuation level over the next five years, it would reduce shareholder returns by 17.5%, effectively wiping out earnings growth and dividends over that time period. The stock is markedly volatile due to its high debt load, which is an added risk factor.
As a result, only those who can stomach extreme stock price volatility and have confidence in the ability of Wynn Resorts to navigate through the current crisis should consider buying the stock.
Top Casino Stock #3: MGM Resorts (MGM)
MGM Resorts owns and operates casinos, hotels and conference halls in the U.S. and China. It generates 81% of its revenues in the domestic market and 19% in Macau. The company has by far the least exposure to Macau in this group of stocks. As a result, it suffered much less than its peers from the trade war between the U.S. and China and the protests of people in Macau a few months ago.
However, the company is highly exposed to the outbreak of coronavirus, just like its peers. Due to the rapid spread of the coronavirus, MGM Resorts suspended all its casino operations in Las Vegas on March 16th and does not accept hotel reservations for the dates prior to May 1st. The company also closed its casino in Maryland.
In late April, MGM Resorts reported (4/30/20) financial results for the first quarter of fiscal 2020. Revenue plunged -29% due to the suspension of the operations of the company in the U.S. and Macau. MGM resorts earned $1.5 billion from real estate transactions but it switched from a profit of $0.14 per share in last year’s quarter to an adjusted loss of $0.45 per share. MGM Resorts has missed analysts’ consensus in 9 of the last 11 quarters.
Due to the unprecedented downturn that has resulted from the pandemic, MGM Resorts cut its dividend by 98%. Thanks to a series of initiatives, the company has reduced its cash burn rate to $270 million per month. In addition, MGM Resorts has no debt maturities until 2022, which gives management confidence that the company can make it through the downturn relatively intact.
Source: Investor Presentation
The U.S. casinos are likely to reopen soon but revenues will remain suppressed for months. Moreover, MGM Resorts still has a relatively large amount of debt, as its net debt exceeds the current market cap of the stock.
Nevertheless, due to the headwind of coronavirus, along with a huge debt load, shareholders should not expect a material boost in dividends and share repurchases for the foreseeable future. That said, the company has a positive long-term outlook for conventions and sports betting in the domestic market, as well as the ramp-up of the recently-built MGM Cotai resort, MGM Springfield, and Park MGM.
As soon as the coronavirus crisis comes to an end, MGM Resorts will benefit from these growth drivers. The company will also enhance its earnings growth via its initiative “MGM 2020”, which aims to expand margins by reducing operating costs and enhancing the efficiency of the company.
Due to the headwind from coronavirus, we expect MGM Resorts to report a net loss in 2020. Earnings-per-share are expected to gradually turn positive, with expected annual growth of 5% through 2025. After the massive dividend reduction, returns from dividends will be negligible until the full dividend is restored. Finally, a contracting valuation multiple could be an additional headwind for shareholders. Adding it all up, we expect total annual returns near zero over the next five years.
The collapse in profits resulting from the outbreak of coronavirus has caught the company off guard with a high debt load. This debt load increases the risk of the stock and hence investors should be careful before buying the stock.
Top Casino Stock #2: Melco Resorts (MLCO)
Melco Resorts owns and operates casino gaming and entertainment casino resort facilities in Asia. It generates ~87% of its revenue in Macau and ~13% in the Philippines. As Melco Resorts is the most leveraged to the gaming activity in Macau in this group of stocks, it is the most vulnerable company to the downturn in the area due to the outbreak of coronavirus.
On the other hand, the situation regarding coronavirus has remarkably improved in China in the last few days and the worse seems to be behind for the country, though it is still too early to draw definitive conclusions. If this improvement proves sustainable, Melco Resorts will greatly benefit in the back half of the year.
In 2019, Melco Resorts grew its revenue 11% and its earnings per share 15%, primarily thanks to its strong performance in the mass market table gaming activity. But conditions have predictably reversed to start 2020, with first-quarter revenue declining 41% and adjusted property EBITDA down 82% year-over-year.
Source: Investor Presentation
As soon as the effect of coronavirus begins to fade, the company has promising growth prospects ahead. It will benefit from the ramp-up of activity in its Morpheus Resort, which opened in mid-2018, and attract an increasing number of visitors in Cotai thanks to improvements in mass transportation.
Melco Resorts is also expanding its City of Dreams in Macau and is taking steps to open an integrated resort in Yokohama, Japan. All these initiatives are likely to be significant growth drivers as soon as Macau returns to normal.
On the other hand, due to its extreme leverage to gaming activity in Macau, the stock is highly vulnerable to any negative development related to coronavirus. Therefore, despite the promising growth prospects, we hold modest expectations for Melco, due to its extreme leverage to the activity in Macau.
It is worth noting that the gaming activity in the area was facing another headwind, protests from civilians, before the outbreak of coronavirus. Overall, we expect 1.9% average annual growth in earnings per share over the next five years.
The company is expected to post a significant loss for 2020. Earnings-per-share are expected to recover to $0.57 in 2021. In a normalized economic backdrop, this would mean the stock trades for a P/E ratio of approximately 27, based on 2021 earnings. We view the stock as fairly valued. Therefore, shareholder returns will be fueled by earnings-per-share growth. The stock had a 4%+ yield recently, but the company has suspended its dividend for the foreseeable future in an effort to preserve cash. Therefore, total returns are expected at just ~2% per year until the dividend is restored.
Given its healthy balance sheet, the company is likely to resume paying dividends once the coronavirus crisis ends. On the other hand, income-oriented investors should remain cautious, as the company is highly vulnerable to economic downturns and is very sensitive to any casino-related policy change in China and the ongoing coronavirus crisis.
Top Casino Stock #1: Las Vegas Sands (LVS)
Las Vegas Sands is a leading developer and operator of integrated resorts in the U.S. and Asia. It generates 67% of its revenue and 58% of its adjusted EBITDA in Macau.
Due to the outbreak of coronavirus, Las Vegas Sands is facing strong headwinds in Macau and in the U.S. As mentioned above, gaming activity has collapsed in Macau. In addition, due to the propagation of the virus in the U.S., all the casinos in Las Vegas were closed for a considerable period. As a result, Las Vegas Sands will incur a significant hit to its earnings this year.
On the other hand, beyond this year, Las Vegas Sands has promising growth prospects ahead. As Japan legalized casino gambling three years ago, Las Vegas Sands has announced that it intends to open integrated resorts in Tokyo and Yokohama. The company is the favorite bidder in this contest, which is expected to be a significant growth driver, though it will take a few years until the company earns a license and builds its new properties in Japan.
Not only do we see potential for strong earnings growth along with a high dividend yield for this stock, Las Vegas Sands also earns the top ranking because of its strong balance sheet and healthy liquidity. The company estimates it can continue operating in a “near-zero” revenue environment for 18 months without raising additional capital.
Source: Investor Presentation
Furthermore, Las Vegan Sands continues to pursue growth by expanding and upgrading its Macau properties. The company launched Four Seasons Tower Suites Macao last year and it expects to perform its grand opening this year while it also expects to launch the Londoner Macao within 2020-2021 and expand Marina Bay Sands in Singapore.
In addition, Las Vegas Sands will benefit from the debut of the light rail system connecting Macau to the entire China rail network. This project will significantly increase the traffic to the casinos in Macau. Thanks to all these growth drivers and given the suppressed earnings expected this year, we expect the company to grow its earnings per share by about 4% per year over the next five years.
Las Vegas Sands stock offers a very attractive 6.4% dividend yield, which has partly resulted from the nearly 30% plunge in the stock price in the last month due to coronavirus. The dividend is almost fully covered by the earnings and the free cash flows and the company has the strongest balance sheet in its peer group. On the other hand, due to the high payout ratio (~105% due to the dip in earnings expected this year), investors should not expect material dividend growth going forward. And, because of the dividend payout ratio above 100%, a continued decline in earnings per share could threaten the dividend.
The company is expected to see earnings dry up in 2020; our estimate of its full earnings power in a normal economy is annual earnings-per-share of $4.01. Based on this, the stock has a price-to-earnings ratio of 12.3, which is lower than our fair value estimate of around 17.0. If the stock reaches our fair valuation level over the next five years, it will see a 6.7% annualized boost in its returns. Overall, given the expected EPS growth of 4% per year and its 6.4% dividend, the stock could generate a 17.1% average annual return over the next five years.
We believe Las Vegas Sands is the top casino stock right now, due to its high expected rate of return over the next five years, but also its strong balance sheet. This means it is likely that the company will easily navigate through the ongoing coronavirus crisis and will enjoy a strong recovery whenever the headwind disappears from the horizon.
After a two-year slowdown, the gaming activity in Macau enjoyed a strong recovery in 2017-2019. However, Macau is now facing a more severe downturn, namely the outbreak of coronavirus. The same is true for the U.S. as well, as the propagation of the virus has resulted in the closure of the casinos in Las Vegas. As a result, all the above casino stocks are going through a fierce downturn right now.
Melco Resorts seems the least attractive choice whereas Las Vegas Sands has by far the most attractive risk/reward profile. Wynn Resorts and MGM Resorts offer a lower expected return than Las Vegas Sands. Additionally, we prefer Las Vegan Sands for its stronger balance sheet, which is paramount during severe downturns.
While we expect the coronavirus crisis to end later this year, no one is absolutely sure when this crisis will end. To provide a perspective for the severity of the downturn, all the U.S. casino companies asked Congress for emergency financial help, as several industries have been impacted by coronavirus. Certain gaming regions like Las Vegas are preparing to reopen, which would be a major positive step for the casinos.
That said, casino operators will likely see profits evaporate and report significant losses, at least for one quarter but potentially for 2020. There is also the potential for further dividend cuts or suspensions across the industry, if the crisis continues for the remainder of 2020.
It is thus critical for investors to make sure that their companies can easily endure a prolonged crisis without being devastated. Therefore, the superior balance sheet of Las Vegas Sands is a crucial parameter and helps explain the fact that the market has punished Las Vegas Sands much less than its peers in the ongoing downturn.