Las Vegas Sands (NYSE:LVS) is actively rewarding shareholders with growing dividends and big share buybacks, and management plans to continue increasing cash distributions in the middle term. While this can be a big plus for investors in Las Vegas Sands stock, there are also some reasons for concern, since the company will most likely need to increase debt to pay for these distributions. Is Las Vegas Sands making a smart bet with its capital distributions or is management taking excessive risks?
Big buybacks and more to come
Las Vegas Sands is embarked in an ambitious capital return program. The company raised dividends by 40% in 2013 and 42.9% in 2013, management has committed to increasing dividends by at least 10% annually over the long term; and recent dividend increases show that the company is not being shy at all when it comes to dividend payments.
In addition, Las Vegas Sands has already taken action on $1.7 billion of its $2 billion repurchase program announced in June 2013. While the $300 million in remaining buyback authorization doesn't sound like much, management is quite confident on its ability to obtain further authorizations to increase buybacks in the future.
CEO Sheldon Adelson was asked during the latest earnings conference call if the company is planning to increase capital distributions, and his answer was quite straightforward:
We are -- we had a board meeting yesterday and I discussed with the board that -- I wanted them to think about the dividend policy and about stock repurchase, and then we would bring it up. We have enough money for the stock repurchase to go through on our regular program to go to this current quarter. And I expect that we will have some dividend news and stock repurchase news on the next earnings call for the third quarter.
Las Vegas Sands is reporting earnings for the third quarter on Oct. 15, among other things; investors may want to pay attention to dividends and buybacks announcements, since it seems like there may be some interesting news in that area.
Macau casinos are going through a very challenging period lately. Gaming revenues in the region have declined over the last four consecutive months, and data for September was particularly worrisome, with a decline of 11.7% versus the same month in 2013.
Chinese authorities are implementing a series credit and visa of restrictions on Macau VIP gamblers to fight corruption and money laundry. In addition, political protests in Hong Kong are hurting Macau tourism, since many tour groups from Mainland China typically visit Macau and Hong Kong in the same trip. As these trips are being canceled due to political agitation in Hong Kong, Macau is feeling the pain, too.
Importantly, Las Vegas Sands is planning to make big investments in its Parisian Macau complex in 2014 and 2015. Total capital expenditures are expected to more than double from $898 million in 2013 to $1.9 billion in 2014, while capital expenditures in 2015 are expected to be in the area of $2.21 billion.
During the first half of 2014 Las Vegas Sands produced $2.39 billion in cash flows from operations, while capital expenditures required $527 million, leaving $1.86 billion in free cash flows. Dividends and buybacks absorbed a total of $2.73 billion during the quarter. Especially if cash flows from operations are under pressure and the company is increasing both capital investments and distributions to shareholders, Las Vegas Sands will most likely need to increase debt over the coming quarters.
On the other hand, short-term uncertainty usually creates opportunities for smart investors to buy high quality companies at discounted valuations, and his seems to be the case for Las Vegas Sands stock. While it's hard to tell how long it may take for revenues Macau to get back on track, exposure to the region is a huge opportunity for growth due to economic expansion in China and increased consumer spending in the Asian region over decades to come.
Las Vegas Sands stock has fallen by 23.7% year to date, and valuation looks quite attractive for a company in such a profitable business and offering substantial potential for growth over the long term. Trading at a forward P/E ratio of 13.9, Las Vegas Sands is conveniently valued in comparison to a forward P/E ratio of 17.1 for companies in the S&P 500 index based on data from Morningstar.
By seizing the opportunity to repurchase stock at convenient prices, management is making a smart use of the company's money, even if this means having to issue debt in the short term. In any case, Las Vegas Sands has a debt to equity ratio in the neighborhood of 1.4, which is not excessively high for a financially strong business.
Besides, according to current plans, capital expenditures will be materially reduced in 2016 and 2017, falling to $1.05 billion and $600 million respectively. This means Las Vegas Sands will be in a much more comfortable position to finance capital expenditures and cash distributions to investors via internally produced cash flows after 2015.
The bottom line
Issuing debt to finance stock buybacks and dividend increases can always raise some concerns among investors, especially when a company is facing a challenging scenario. However, Las Vegas Sands is doing the smart thing by capitalizing the opportunity to repurchase stock at convenient valuation levels, and the company has the financial strength to continue making big cash distributions while investing for growth over the coming years. Investors in Las Vegas Sands stock should be benefited from management's capital allocation decisions over the long term.