Updated on August 6th, 2021 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 were paying dividends to their shareholders before the onset of the pandemic, but they have either suspended or drastically reduced their dividends due to the severe downturn in their business.
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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 over the past year due to the coronavirus crisis, which 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 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
- Top Casino Stock #4: Wynn Resorts (WYNN)
- Top Casino Stock #3: MGM Resorts (MGM)
- Top Casino Stock #2: Melco Resorts (MLCO)
- Top Casino Stock #1: Las Vegas Sands (LVS)
Additionally, you can see similar analysis in the YouTube video below.
Casino Industry Overview
The casino industry is in severe distress right now. The spreading coronavirus and resulting 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.
As a result, accumulated gross gaming revenue plunged in 2020 and to begin 2021. Importantly, gaming activity showed a return to year-over-year growth starting in February. Gaming revenue has posted year-over-year growth in each month since. For example, July gross gaming revenue increased 528% from the same month last year. Year-to-date, gaming revenue has increased 64%.
This could be the start of a recovery if the pandemic subsides further throughout 2021. Still, the high sensitivity of casino stocks to all the developments related to China 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. The company is now facing the headwind of coronavirus in all the regions in which it operates.
In the 2021 second quarter, operating revenue soared to $990 million, from just $86 million in the same quarter last year. The company still posted a net loss of $131 million, or $1.15 per share, but this was a marked improvement from $5.97 per share in the year-ago period.
Wynn Palace opened just two years ago; it has ample room to grow further. Also, Wynn Resorts completed its building of ‘Encore Boston Harbor’ and opened its doors to this integrated resort and casino in Everett, Massachusetts in June of 2019.
Moreover, Wynn Resorts aims to expand to Japan, which legalized casino gambling three years ago. It was expected that it would take several years before the company opens a casino in the country even before the impact of COVID-19 was felt.
Another potential growth catalyst for Wynn Resorts is interactive gaming. The company has invested heavily in this area through its Wynn Interactive unit, which offers casino and sports betting on mobile devices. Its brands include BetBull, Wynn Bet and Wynn Slots.
Source: Investor Presentation
The company estimates it can generate over $700 million from interactive gaming in 2023. The company has secured market access in 15 states, with another 9 states in negotiations.
Wynn Resorts has grown its earnings-per-share at a 5.3% average annual rate during the last decade. We maintain our 4% growth rate through 2026 as we believe that it may take consumers longer to return to places of large crowds even after casinos are allowed to have more patrons.
Wynn suspended its dividend during the pandemic and has not reinstated the dividend yet, making the stock relatively unappealing for income investors.
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 may consider buying the stock but even those investors should wait for a better entry point.
Top Casino Stock #3: MGM Resorts (MGM)
MGM Resorts owns and operates casinos, hotels and conference halls in the U.S. and China. The company has 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, but it also struggled with the pandemic, just like its peers. Due to the rapid spread of the coronavirus, MGM Resorts suspended all its casino operations in Las Vegas for a considerable period.
Fortunately, the company’s operating results have recovered along with the industry. In the 2021 second quarter, net revenue of $2.3 billion increased 683% from the same quarter last year. Operating income of $264 million compared with an operating loss of $1 billion in the year-ago quarter.
Adjusted EPS came to a loss of $0.13 for the second quarter, which was significantly smaller than the adjusted EPS loss of $1.52 in the 2020 second quarter.
On the bright side, MGM gained significant market share in its sports betting business, BetMGM. It has launched this business in seven states and expects to be present in 20 states within the next 12 months.
Source: Investor Presentation
Due to the unprecedented downturn that has resulted from the pandemic, MGM Resorts cut its quarterly dividend by 98% in 2020 down to a token level of $0.01 per share. Moreover, the principal amount of debt totals $12.7 billion. On the bright side, on August 20th, 2020, IAC reported a 12% stake in MGM Resorts. IAC has a portfolio of brands and digital expertise, which is expected to help MGM Resorts leverage its digital assets.
We expect business improvement this year thanks to the massive vaccination program underway, but we still expect MGM Resorts to post negative EPS in 2021. This means the company is unlikely to reinstate its full dividend any time soon. As soon as the coronavirus crisis comes to an end, MGM Resorts will benefit from these growth drivers.
Earnings-per-share are expected to gradually turn positive, with expected annual growth of 4% through 2026. After the massive dividend reduction, returns from dividends will be negligible until the full dividend is restored as earnings-per-share rebound.
Finally, the market has already priced a strong recovery in the stock and hence we expect the valuation multiple of the stock to contract significantly in the upcoming years. That could be an additional headwind for shareholders. Overall, we expect weak total returns from MGM Resorts over the next five years.
Top Casino Stock #2: Melco Resorts (MLCO)
Melco Resorts owns and operates casino gaming and entertainment casino resort facilities in Asia. 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. Conditions deteriorated in 2020 due to the pandemic, as revenue fell 70% for the year.
Fortunately, the company has seen a strong recovery like its competitors in the past year.
Source: Investor Presentation
As the effect of coronavirus continues to fade, Melco Resorts has promising growth prospects ahead. It will benefit from the ramp-up of activity in its Morpheus Resort, which opened in mid-2018, and will 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. It is also developing City of Dreams Mediterranean, which will become the largest integrated resort in Europe. All these initiatives are likely to be significant growth drivers as soon as Macau returns to normal.
Overall, we expect 2% average annual growth in earnings per share over the next five years. The stock had a 3% dividend yield before the pandemic, but the company has suspended its dividend for the foreseeable future in an effort to preserve cash.
On the other hand, 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.
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. While the coronavirus pandemic has significantly affected Las Vegas Sands, the company has promising growth prospects ahead.
Due to the pandemic, Las Vegas Sands has suspended its dividend since early 2020. However, the company has promising growth potential and is likely to restore its dividend when the pandemic subsides, most likely in late 2021 or 2022. Las Vegas Sands earns the top ranking thanks to these features as well as its strong balance sheet and healthy liquidity.
Source: Investor Presentation
Furthermore, Las Vegan Sands continues to pursue growth by expanding and upgrading its Macau properties. 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 when the pandemic subsides and the strict travel restrictions in Macau are lifted.
Thanks to all these growth drivers, we expect the company to grow its earnings per share by about 4% per year over the next five years.
Las Vegas Sands stock previously offered a hefty dividend of $3.08 per share annualized, but the company suspended its dividend in 2020 amid the coronavirus crisis. If the company were to reinstate its dividend at the same level, shares would yield 7.5% at the current stock price.
Las Vegas Sands reported its second-quarter earnings results on July 21. Net revenue was $1.17 billion, compared to $62 million in the prior year quarter. Operating loss was $139 million, compared to $757 million in the 2020 second quarter.
Separately, in March 2021 the company announced it will sell its Las Vegas real property and operations for $6.25 billion. Las Vegas Sands expects the transaction to close in the fourth quarter. The sale will help free up significant cash which the company can use for a variety of purposes, including investing in growth and paying down debt.
We also believe that Las Vegas Sands has the strongest balance sheet in its peer group. This means that the company is likely to better navigate through the ongoing coronavirus crisis.
Gaming activity in Macau enjoyed a strong recovery from 2017-2019 but Macau is currently facing a severe downturn due to the coronavirus crisis. The same is true for the U.S. as well, as the pandemic resulted in weak gaming revenues. As a result, all the above casino stocks are going through a fierce downturn right now.
On the bright side, the rollout of vaccines is steadily progressing. As a result, the pandemic is likely to subside in the second half of 2021. However, this does not mean that investors should rush to buy casino stocks. Casino stocks are volatile, and none of the stocks pays a meaningful dividend, meaning investors should be especially careful before initiating a position.