In the casino business, the house always wins. So if you have a few thousand dollars to spare, it's probably smarter to invest in casino operators instead of gambling away your hard-earned cash at their tables.
Several of the biggest casino operators even pay you dividends to own them. Let's examine three of the most generous payers on that list -- Las Vegas Sands (LVS -1.18%), Wynn Resorts (WYNN 1.38%), and MGM Resorts International (MGM 0.99%).
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Las Vegas Sands
Las Vegas Sands, the biggest casino operator in the world, also pays the biggest dividend. Its forward dividend yield of 5% dwarfs the S&P 500's current yield of 2%, and it's hiked that payout annually for four straight years.
Sands' dividend initially looks wobbly, since it gobbled up 126% of the company's earnings and 101% of its free cash flow over the past 12 months. Payout ratios exceeding 100% often indicate that a dividend cut could be in the cards, but Sands' cash flow has been improving -- thanks to rebounding gaming revenues in Macau and the opening of its new Parisian Macao casino resort last September.
Source: YCharts
Moreover, EBITDA is generally a better indicator of profitability for gaming resorts than earnings and free cash flow. Sands' dividend payments only used up 75% of its EBITDA over the past 12 months -- indicating that it shouldn't slash its dividends anytime soon. Analysts also expect Macau's recovery to respectively boost Sands' revenue and earnings by 8% and 11% this year.
Wynn Resorts
Shares of Wynn plunged nearly 80% in 2014 and 2015, mainly due to the slowdown in Macau. That precipitous decline caused its trailing yield to briefly hit 7.5% in 2015 -- but investors were too alarmed by Wynn's deteriorating results to consider it a good income play.
That caution was warranted, since Wynn cut its dividend by 67% in April 2015. But after the stock bottomed in the high-$50s, Wynn made a slow but steady comeback as Macau revenues rose year-over-year over the past nine months (ending in April). The Wynn Palace on the Cotai Strip started luring back gamblers and guests, and its revenue and earnings are respectively expected to grow 30% and 40% this year.
Wynn currently pays a 1.6% yield, which used up 111% of its earnings and 208% of its free cash flow over the past 12 months. Those payout ratios look ugly, but we should note that Wynn's earnings and FCF are now both growing, thanks to rebounding growth in Vegas and Macau.
Source: YCharts
Wynn's dividend payments also accounted for just 28% of its EBITDA over the past 12 months, which means that it can continue supporting its current yield until its earnings and FCF-based FCF ratios drop to more sustainable levels.
MGM Resorts International
MGM only started paying a dividend earlier this year, with its $0.11 per share quarterly payout in March. That equals a 1.4% forward yield -- assuming that MGM keeps up with its payments. MGM relies less on Macau than Sands and Wynn (it only runs one joint venture resort in the region), so its FCF growth hasn't benefited as much from Macau's recovery.
Source: YCharts
Instead, MGM is mainly known for its Vegas Strip properties, including MGM Grand, Bellagio, Mandalay Bay, and The Mirage. It also owns a 50% stake in the CityCenter mixed-use urban complex.
MGM's negative FCF is troubling, but analysts expect its revenue to rise 16% this year and for its earnings to grow 11%, fueled by the strength of its Vegas properties. MGM spent $63.2 million on its first quarterly dividend payment, which was equivalent to just 9% of its EBITDA last quarter. That low ratio indicates that MGM has plenty of room to raise its dividend.
So which casino player is the best dividend payer?
Las Vegas Sands is the best all-around play for both income and growth in this tough industry. It has the biggest presence in Macau (which generates more than half its EBITDA), pays the highest dividend, and its P/E of 26 is much lower than the industry average of 112 for casino operators.
Wynn is an interesting comeback play, but it has a much higher P/E of 48 and pays a lower dividend. MGM might be considered a value play at 15 times earnings, but it's more of a play on the mature Vegas market instead of Macau -- which arguably offers more room for long-term growth.
