Dividends can be a great way to beat the market long-term and keep cash flowing whether you need cash in retirement or are using it to diversify your portfolio. And for one of the gaming industry's biggest companies, Las Vegas Sands (NYSE:LVS), the dividend is an attractive pull for investors. The current yield of 6.1% is lofty by any standard, and it's been growing in recent years, but there may also be risks ahead.
How much does Las Vegas Sands' dividend cost?
With 795 million shares outstanding on a diluted basis, the current dividend is $0.72 per quarter. This means that it costs the company $2.29 billion per year.
Since I'm going to use earnings before interest, taxes, depreciation, and amortization (EBITDA) as the cash flow metric to compare this against, we should also take into account the ongoing cost to service debt. Last quarter, interest expense was $68.6 million, so annually the company has to generate $2.56 billion to service debt and pay the dividend. Investors will want to see it reach this bar.
How much cash can Wynn Resorts generate?
Despite all of the challenges in Macau over the past 12 months, Las Vegas Sands has generated $4.04 billion in EBITDA, which is more than enough to cover its interest expense as well as its dividend. That doesn't quite tell the whole story, however. About $2.18 billion of that EBITDA was generated in Macau, where Las Vegas Sands only owns 70.2% of its business. Another $1.37 billion was made in Singapore. Some of these funds may be subject to repatriation taxes, and although they may be minimal, they're worth considering along with the partial ownership of the Macau operation.
By contrast, only $462 million in EBITDA was generated in the U.S., which can be used directly for dividends. When you look at it this way, there's not a huge margin of safety for Las Vegas Sands when it comes to costs right now.
Will there be cash flow growth in 2016?
One challenge ahead may be the lack of growth opportunities. The Parisian in Macau is due to open later this year, but given the decline in Macau's gaming market and the new entrants on Cotai, I would be surprised if 2017 EBITDA grows at all compared to the past year.
What works in Las Vegas Sands' favor is that it has diverse resorts and strong margins, so I don't think downside risk is as high with it as it is with many competitors, even if upside potential isn't very high.
The dividend may not be as safe as it appears
Las Vegas Sands has thus far kept its dividend where it is -- though, if Asian markets decline in 2016 and 2017, a dividend cut may be in order. The company has the ability to add debt if it wants to, but leveraging its balance sheet to keep dividends intact wouldn't be a wise move in the long run.
I think Las Vegas Sands is well positioned in gaming long term, but I wouldn't buy the stock for the dividend alone. It just doesn't have much margin for error and there's more risk of a dividend reduction in the future than in some of its competitors that have lower payouts and more upside.