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Is It Smart to Gamble on Melco Crown's New Dividend Policy?

By Eric Volkman - Feb 26, 2014 at 12:00PM

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Melco Crown is set to pay the first dividends in its history; we take a look at whether that makes the stock a buy, particularly when matched against its rivals.

The slot machine will finally spit out some coins: The board of Melco Crown Entertainment (MLCO -13.23%) has recommended that the company initiate dividend payments, starting with a special distribution to be handed out in April. That payout yields 0.8% on the firm's American Depositary Shares. That's pretty thin, due in no small part to the fact that the prices of both the underlying shares and the ADSes are quite rich these days. So, does the likely new dividend regimen make the company a buy, or are there comparable stocks more worthy of an investor's bet?

30% payout
The board is proposing that after the special dividend is paid out, Melco Crown pay a distribution equal to around 30% of its annual net profit, split into quarterly payments. If applied to the company's fiscal 2013 attributable net, it would amount to just over $191 million -- or $0.1147 per share, the amount of the special dividend. This equates to $0.3441 for American investors, as the firm's ADSes are the equivalent of three underlying shares.

Melco Crown is a hot stock, and there's every fundamental reason for it to be. The company has been doing smashing business lately, with Q4's attributable net income more than doubling on a year-over-year basis to $223 million. The top line, meanwhile, advanced by 27% across that stretch of time to reach almost $1.4 billion. And in the fairly short period from fiscal 2010 to 2013, the company grew its revenue by just under 100%. 

It's almost impossible not to make piles of money being in Melco Crown's position. It's one of only six companies with a concession to operate casinos in Macau, which is far and away Asia's gambling mecca. The enclave -- once a Portuguese colony, now in the possession of China --now has a gaming industry seven times that of Las Vegas. 

Here come the crowds
And Macau is just getting started. According to a recent research report from Nomura Securities, its gaming market should rise -- rather easily -- from its most recent annual level of $45 billion to $80 billion. This is because a great many mainland Chinese have never been to the place, with only around 19 millionof the nation's 1.3 billion people trekking there to gamble away their money last year. Even a modest (and easily achievable) bump in that number would substantially fatten the pockets of the local gaming sector.

As the market goes, so go the lucky concessionaires. Las Vegas Sands (LVS -6.97%) has a big presence in Macau -- there it operates (among other properties) the world's largest casino, the Venetian. The company's local subsidiary, Sands China, saw its revenue advance 28% on a year-over-year basis in its most recent quarter, with net income rocketing ahead 40%. The Macau operations of another American mainstay, Wynn Resorts (WYNN -6.28%), saw a rise of 32% on its bottom line in the company's latest quarter. 

Place your bets!
The Macau growth story is hardly a new one, and Melco Crown is not an overlooked stock. Aided in no small measure by those strong financials and the potential of its market, the company's ADSes have more than doubled in price since the beginning of 2013, and are more than four times where they stood in the summer of 2012.

That's not unusual for Macau operators -- Las Vegas Sands and Wynn Resorts have also benefited from steroid-like price rises over the past year or so. The question is, how does Melco Crown stack up against them in terms of valuations?

The results are mixed. In terms of one-year forward P/E, Melco Crown is pricier than Sands, trading most recently at more than 24 compared to about 19 for its rival (Wynn comes in third, at almost 26). But Melco has the highest anticipated fiscal 2014 to 2015 earnings growth rate, with analysts projecting an 18.5% increase. This handily beats both Sands (13.7%) and Wynn (11.8%).

And of course, there's that dividend. Melco Crown's payout currently yields, again, 0.8% for its ADSes. That isn't in the league of Las Vegas Sands' $2 annual distribution, which harvests 2.4%, or Wynn's $5.00 (2.2%).  

So, when the chips are swept away and the winners given their money, will Melco Crown come out on top? Macau is an unbeatable gambling play as a market despite the steep price climbs of the stocks associated with it. Melco Crown is almost indisputably a good bet, but its rivals are cheaper, and are also set to grow their bottom lines (albeit not as robustly). Perhaps most important for income investors, the dividend payouts of the U.S. operators are set to grow. In the end, the better move might very well be a buy of Las Vegas Sands or Wynn stock.

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Stocks Mentioned

Melco Crown Entertainment Limited Stock Quote
Melco Crown Entertainment Limited
$4.62 (-13.23%) $0.70
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
$58.05 (-6.28%) $-3.89
Las Vegas Sands Stock Quote
Las Vegas Sands
$30.69 (-6.97%) $-2.30

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