Updated on March 17th, 2020 by Aristofanis Papadatos
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. You can find them on our list of list of 674 dividend-paying consumer cyclical stocks.
You can download the entire list of dividend stocks in the consumer cyclical sector (along with important financial metrics like dividend yields and payout ratios) by clicking on the link below:
That said, 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.
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
- Melco Resorts (MLCO)
- MGM Resorts (MGM)
- Wynn Resorts, Limited (WYNN)
- 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 two weeks due to the virus. About half of the tables have returned to service but gaming activity remains depressed.
Gross gaming revenue in the area plunged 87.8% in February and is expected to drop by 75%-80% in March over last year’s period. 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: 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 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 such 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.
Source: Investor Presentation
Moreover, 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 the necessary steps in order to receive a license 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. As long as the gaming activity in the area remains depressed, the company burns cash at a rate of about $2.5-$3.0 million per day. 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 stock trades for a price-to-earnings ratio of 17.9, which is almost equal to our assumed fair earnings multiple of 18.0. If the stock trades at our assumed fair valuation level in five years from now, it will enjoy a mild 0.1% annualized expansion of its valuation level. Therefore, given also its 4.7% dividend yield, the stock is likely to offer a 6.7% average annual return over the next five years.
It is remarkable that Melco Resorts has posted strong free cash flows in 6 out of the last 8 years, with the exception of 2014-2015 due to the downturn in Macau. Given its healthy balance sheet and its low payout ratio, the company is likely to meaningfully grow its dividend in the upcoming years.
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 #3: 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 87.8% in February and is expected to drop by 75%-80% in March over last year’s period.
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.
On the bright side, 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. Due to the headwind from coronavirus, we now expect Wynn Resorts to earn only $3.50 per share this year.
Moreover, the company has been caught off guard, with net debt of nearly $10 billion, which is nearly twice as much as the 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 still expect Wynn Resorts to earn approximately $7.00 per share by 2025 for a 14.9% average annual growth rate.
Due to its 59% plunge in the last month, the stock is currently trading for a price-to-earnings ratio of 16.0, which is much lower than its historical average of 30.1. However, the stock has traded at abnormally high ratios in certain years over the past decade, due to the temporary collapse of its earnings in those years. Overall, we assume a fair earnings multiple of 18.0 for Wynn Resorts.
If the stock reaches our fair valuation level over the next five years, it will enjoy a 2.3% annualized gain due to an expanding valuation multiple. Including its 7.3% dividend, the stock is likely to offer a 24.5% average annual return over the next five years. The exceptionally high expected return has resulted primarily from the recent collapse of the stock due to coronavirus.
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 #2: 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 its latest earnings report, MGM Resorts grew its revenue 4% and switched from a loss of -$0.03 per share to a profit of $0.08 per share. However, it missed analysts’ consensus by $0.19 due to weakness in hold and Far East baccarat. Since the company has missed analysts’ consensus in 8 of the last 10 quarters, it has poor business momentum.
Furthermore, it has posted losses for six consecutive years over the last decade. It also has a weak balance sheet, with net debt around $18 billion, while its interest expense takes up more than half of its operating income. On the bright side, the company expects to receive approximately $8 billion from the monetization of its real estate and intends to use the proceeds to reduce its debt load and boost its shareholder returns.
Source: Investor Presentation
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 earn only $0.60 per share this year. Due to the low comparison base of this year, we expect 29.0% annual earnings-per-share growth over the next five years. The stock is currently trading at a price-to-earnings ratio of 17.0. As the company has reported losses in six of the past 10 years, its price-to-earnings history is not reliable. We believe that a fair price-to-earnings ratio for this stock is around 16.0.
If the stock reaches our fair valuation level over the next five years, it will incur a 1.2% annualized drag on shareholder returns. But given its 5.8% dividend yield and 29.0% annual earnings-per-share growth forecast, the stock could generate a 33.6% average annual return over the next five years.
Investors should realize that the exceptionally high expected return of MGM Resorts has resulted mostly from the 69% plunge of the stock in the last month, which has sent the stock to a 7-year low. The collapse of the stock resulted from the outbreak of coronavirus, which 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.
Nevertheless, while we always prefer to avoid leveraged companies, we believe that MGM Resorts will be able to service its debt and will enjoy a strong recovery after the coronavirus crisis is over.
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.
Source: Investor Presentation
Due to the outbreak of coronavirus, Las Vegas Sands is facing strong headwinds in Macau in the U.S. As mentioned above, all the casinos in Macau closed for two weeks in February and gaming activity is still too low in the area. In addition, due to the propagation of the virus in the U.S., all the casinos in Las Vegas will be closed for a considerable period, until the situation improves. 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.
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 6.3% per year over the next five years.
Las Vegas Sands also offers a very attractive 7.8% dividend yield, which has partly resulted from the 40% 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 stock is currently trading at a price-to-earnings ratio of 13.3, which is lower than its historical average of 23.0. However, we believe that a fair earnings multiple for this stock is around 17.0. If the stock reaches our fair valuation level over the next five years, it will see a 5.0% annualized boost in its returns. Overall, given its 6.3% annual earnings-per-share growth and its 7.8% dividend, the stock could generate a 19.1% average annual return over the next five years.
Wynn Resorts and MGM Resorts have higher expected returns than Las Vegas Sands but we believe that the latter is much more attractive thanks to its rock-solid balance sheet, which ensures us 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 higher expected return than Las Vegas Sands but 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 this week, with the response being unknown yet, as several industries have been impacted by coronavirus. Casino operators will likely see profits evaporate and report significant losses, at least for one quarter. There is also the potential for dividend cuts 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.