Wynn Palace in Macau. Image source: Wynn Resorts.
Over the last few years, gaming stocks have gone from being high-risk investments to ones that consistently pay a solid dividend. Wynn Resorts (WYNN 0.86%) was one of the first to pay a dividend, and today it's paying $2.00 per year to investors, or about a 2% dividend yield.
But earnings can be volatile in gaming, and that payout may not be as safe as those of other dividend stocks. Just how safe is Wynn Resorts' dividend? Let's look at the numbers.
How expensive is Wynn Resorts' dividend?
At the end of the first quarter, Wynn Resorts had 101.7 million shares outstanding on a fully diluted basis. And its $0.50-per-share quarterly dividend means the company needs to generate $50.8 million per quarter in cash flow, on top of paying for debt, to maintain its dividend.
Interest expenses (adjusted for a one-time benefit) are currently $70.4 million per quarter. So, it's really $121.2 million Wynn Resorts needs to generate from operations to cover debt and the dividend. That's the bar investors should look for Wynn to reach.
How much cash does Wynn Resorts generate?
The best way to figure out cash flow from a gaming company is by looking at adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization. This number is essentially the cash generated by a resort that can then be used to pay for the cost of debt, taxes, and earnings to shareholders.
In the first quarter, Wynn Resorts generated $300.3 million in adjusted EBITDA, which is nearly 2.5 times the amount needed to cover interest and the dividend. For the sake of the dividend, we also need to look at cash generated in the U.S., because the Macau operations are publicly traded in Asia and are only 72.3% owned by Wynn Resorts. Dividends from Macau may also be subject to U.S. taxes. But Las Vegas generated $109.0 million in the quarter, more than enough to pay the dividend and the U.S. portion of the company's debt load.
Rendering of Wynn Boston Harbor, which is currently under construction. Image source: Wynn Resorts.
What about growth?
The numbers above show that Wynn Resorts is generating plenty of money to maintain its dividend, but that doesn't take into account future growth projects. Wynn Palace will open later this summer in Macau, and projections are that it will add at least $150 million, if not $250 million in EBITDA per quarter. Since most of the debt to pay for this project is already on the balance sheet, this is incremental cash flow that could be used to pay down debt, increase the dividend, or even add cash to the balance sheet.
Wynn is also building Wynn Boston Harbor, which has a price tag around $1.7 billion. When completed, it will generate even more cash within the U.S.
Wynn's dividend is safe...for now
Right now, it appears Wynn Resorts' $0.50-per-share dividend each quarter is safe, especially when you consider the growth projects on the horizon. But investors will want to watch gaming revenue in Macau to ensure that operating conditions don't deteriorate far enough that the dividend will need to be cut. That's the biggest risk to the dividend, but if Macau recovers, we could see a bright future for this dividend stock.
