Melco Crown (NASDAQ:MLCO) has the newest dividend in gaming and there are certain things about the payout you should know before deciding whether to buy shares. The company's exposure to the Asian gaming market, combined with a strong balance sheet, gives the company a stable footing to pay investors for years to come.
But there are a few things investors should know about Melco Crown's dividend before jumping in. This isn't your everyday dividend stock, after all.
Melco Crown is reliant on Macau ... for now
If you're looking for a dividend from a diverse company with many revenue streams, this isn't it. Melco Crown currently generates 100% of its revenue and earnings from Macau and even a joint venture in the Philippines due later this year won't do much to change that. Melco Crown is a bet on Macau and the cash flows associated with gaming there.
This may not be a diverse dividend, but that doesn't mean it's bad. Not all dividends are exactly alike and as long as investors know that Melco Crown's dividend is reliant on Macau, they're making an informed investment. That's what they should be doing.
Melco Crown's dividend won't be consistent
When Melco Crown decided earlier this year to institute a dividend, management said it wanted to pay out "30% of the Company's annual consolidated net income" to shareholders. We've seen that in the last three quarters when the dividend has been $0.129, $0.078, and $0.072 per share.
This non-consistent dividend may not be the normal policy for most dividend paying companies, but from a corporate perspective it's a wise way to go. Management doesn't get stuck paying a dividend it can't afford in bad times and it is more inclined to increase the dividend when profits are up.
Again, it's not good or bad that Melco Crown's dividend isn't consistent quarter to quarter, it's just something investors need to know before jumping in. The dividend yield that was implied last quarter may not last next quarter and you may have to adjust expectations for yield as a result. The stock currently has a 1.1% yield.
There's still plenty of room for growth
When companies set dividend plans they need to consider growth plans for their business along with dividend obligations for shareholders. The policy outlined above combined with a balance sheet with relatively little in debt allows management to grow and pay a dividend.
In the first three quarters of this year, Melco Crown has paid out $155 million in regular dividends and earned $515 million in net income. That's the 30% payout mark they've given investors, but the company generated $1 billion in EBITDA, which is a proxy for cash flow in gaming, from operations. So, management has more than enough cash to invest billions in new developments over the next few years if it chooses and still pay a dividend.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.