Casino stocks have traditionally had too many demands on their free cash flow to pay strong dividends, but lately, Las Vegas Sands (NYSE:LVS) has joined Wynn Resorts (NASDAQ:WYNN) in demonstrating a reliable commitment to rewarding shareholders with regular dividend payouts. Recently, Las Vegas Sands stock has suffered from concerns about a falloff in gaming activity in Macau, but that doesn't mean dividend investors should go into a panic just yet. Let's look more closely at two things every dividend investor should know about Las Vegas Sands right now.
1. Las Vegas Sands hasn't overextended its dividend payouts and can sustain some earnings contraction.
All too often, high-yield dividend stocks end up having to pay out every single penny of available profits in order to keep up their quarterly payments, and that can leave those companies vulnerable to external shocks that cause short-term cyclical downturns in their respective industries. What Las Vegas Sands has seen recently in Macau is exactly the sort of event that could spur dividend cuts in a weaker company, as the drop in revenue might otherwise necessitate dramatic measures to ensure enough available cash to keep operating the business.
In Las Vegas Sands' case, though, the casino giant has done a good job of balancing its capital spending needs with its comfort level in committing to return capital to its shareholders. Even with its impressive 3.5% dividend yield, Las Vegas Sands pays out only 60% of its overall earnings. That compares to a much higher figure of 75% over at Wynn, even when you exclude that company's special dividend payouts.
Right now, most investors expect that Las Vegas Sands will continue to see growing earnings, albeit at a slower pace than in the past. Yet even if Sands suffers a decline in earnings in 2015 due to further slowdowns in Macau, dividend investors can rest assured that the company has enough of a margin of safety to keep paying dividends at current levels.
2. Las Vegas Sands plans to slow down its capital expenditures -- but will it?
One of the advantages of being a first mover in an industry is that a company gets its major investments done early on, leaving a longer period over which to reap the rewards of its foresight. For Las Vegas Sands, being a pioneer on the Macau Peninsula and in the up-and-coming Cotai Strip area of the former Portuguese colony has given it a competitive advantage that has left Wynn and other players scurrying to catch up. At the same time, it doesn't have as much planned spending to worry about on new projects.
Specifically, capital expenditures at Las Vegas Sands should slow markedly in the coming years, with the bulk of its roughly $2 billion in annual spending in 2014 and 2015 coming from its development of the Parisian Macau. Once the Parisian is complete, most of the money Sands needs to spend will be on maintenance, with expectations of just $600 million in capital expenditures by 2017.
The question, though, is whether those projections will prove accurate. Las Vegas Sands hopes that new markets in Japan, Korea, and elsewhere could bring lucrative opportunities to the company, and if they do, Sands will have to ramp up its spending in order to meet the resulting demand. That could necessitate more borrowing and put dividend payments in danger at least temporarily if Sands has to divert all available resources toward capitalizing on new development.
For the most part, though, Las Vegas Sands appears to be on course to keep its dividend-hungry shareholders happy for the foreseeable future. Even with its ongoing challenges, the casino giant has the financial strength to keep making payouts and still move forward with its growth initiatives.
Dan Caplinger 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.