Blue chip stocks are some of the largest, most stable companies in the world and are intended to provide stable investments on the stock market. So, it may be surprising to think of a gaming company like Las Vegas Sands (LVS -0.37%) as a blue chip kind of stock.
After all, it wasn't long ago that casinos were synonymous with mob activity and even Asia's largest gaming market was controlled by one man with questionable mob ties. But today's gaming industry is dominated by public companies like Las Vegas Sands and has grown far beyond the casino floor. That's why it may be time to look at gaming stocks as possible blue chip stocks and the first to consider would be the world's largest gaming company -- Las Vegas Sands.
Las Vegas Sands' Marina Bay Sands in Singapore has become an icon of the city's skyline. Image source: Las Vegas Sands.
More than just a casino
When you think of companies that own casinos it's normal to think of them as strictly gaming companies, but that's not really the case today. In Las Vegas, 70% of Las Vegas Sands' revenue comes from non-gaming activities and the hotel actually generates more revenue than the gaming floor. Macau and Singapore are still big gaming locations but that's changing as these gaming markets mature.
Las Vegas Sands is more than just a casino company, it's the modern entertainment company with destination resorts around the world. As it expands its reach it'll grow even closer to blue chip status.
The Parisian is Las Vegas Sands' next resort in Macau, due sometime next year. Image source: Las Vegas Sands.
Building a global reach
One thing blue chip stocks have in common is a diverse and global reach. 33% of the S&P 500's revenue now comes from international sales and big blue chips like 3M earn over 70% of revenue overseas.
Las Vegas Sands has led the industry from Las Vegas to Macau and then Singapore and today generates over 85% of its revenue outside of the U.S.
This international reach gives Las Vegas Sands stability as well as the ability to cultivate new markets as they emerge. Macau was the first example of that and Las Vegas Sands helped build it into the world's largest gaming market.
Japan could be next and it's looking at allowing a small number of new integrated resorts with gaming and Las Vegas Sands will likely be one of the leading suitors. Las Vegas Sands has built out an international entertainment brand and that's the leadership position a blue chip stock needs to be in.
Returns to rival any blue chip
One of the qualities of a blue chip company is consistent returns for shareholders. On that front, Las Vegas Sands is probably falling below the standard of other blue chips but that may be changing.
You can see below that Las Vegas Sands' return on assets has been wildly volatile over the past decade but in the last two years it's stabilized and now exceeds blue chips like Procter & Gamble and General Electric. If returns stabilize at above 10% annual return on assets it'll be a big step toward making the returns Las Vegas Sands' needs to compare to classic blue chip stocks.
LVS Return on Assets (TTM) data by YCharts
A strong balance sheet
Another stabilizing force of a blue chip stock is its balance sheet and that's where Las Vegas Sands has made massive improvements. It has gone from a typical leveraged gaming company to solid financial footing in just a few short years.
As of the end of the second quarter, Las Vegas Sands had just $7.1 billion in net debt and had generated $5.3 billion in EBITDA -- a proxy for cash flow from operations -- over the previous twelve months. Surprisingly, that gives Las Vegas Sands a similar debt/EBITDA multiple as blue chip rivals.
LVS Financial Debt to EBITDA (TTM) data by YCharts
The strong cash that's generated each quarter can then be used to further improve the balance sheet, grow the business, or pay dividends and buyback shares. It's this return of capital that's begun in earnest with $6.7 billion being returned to shareholders in the last two and a half years and the dividend was recently boosted to $2.60 per share for 2015.
When you add up Las Vegas Sands' standing as a leading entertainment company, its international presence, and strong balance sheet, I think it's time to consider this a blue chip stock. The market may not be ready to include a volatile gaming stock in the same breath with other blue chips but the company has all the makings of a blue chip stock already.
