You know about socially responsible investing, or SRI, where investors steer clear of certain industries – for example, guns, alcohol, tobacco, gambling, military equipment, and prisons -- on principle, objecting to their role in society. But have you thought of investing in these industries on purpose, perhaps adding a sin stock or two to your portfolio? If so, you might want to consider gambling titan Las Vegas Sands (NYSE:LVS).
It's not such a crazy idea, as long as your values permit it. The USA Mutuals Barrier Investor (VICEX) mutual fund, for example, focuses its assets solely on "sin" stocks and has outperformed the S&P 500 over the past five and 10 years (though it lags it a bit over the past three). Las Vegas Sands was its eighth-largest holding as of the end of September.
The Venetian in Las Vegas. Photo: Mark Richardson, Flickr
Why might you buy Las Vegas Sands?
The stock's valuation alone might pique your interest, with its P/E ratio recently close to 18 and its forward-looking P/E near 15 -- both well below its five-year average of 30. The stock has averaged annual growth of 36% over the past five years, though it has pulled back by 13% over the past year. That's enough to make some wonder whether it's a bargain now.
Las Vegas Sands is one of the world's largest casino and resort companies, offering gambling, shopping, dining, and entertainment in locations such as the Venetian, Palazzo, and Sands Expo Center in Las Vegas, Sands Bethlehem in eastern Pennsylvania, and Marina Bay Sands in Singapore. Through a majority ownership of Sands China, it also owns properties on the Cotai Strip in Macau, which has prospered while Las Vegas has struggled.
Dividends are another draw for Las Vegas Sands, as the stock recently yielded 3.2%. The dividend was hiked by a whopping 30% recently, and has doubled in just the past two years. Better still, the company is also rewarding shareholders via stock buybacks, recently upping its $2 billion buyback plan by another $2 billion. That's an effective move when a stock is undervalued. (Some, though, are a bit uneasy that the company has been issuing debt to fund these payouts. But interest rates are low, and the company's capital expenditures are expected to fall in coming years, freeing up funds.)
Then there's growth. Las Vegas Sands' annual revenue has marched steadily upward over the past decade, roughly doubling in the past four years. Free cash flow was negative some years ago, but has grown briskly in recent years and now tops $3.7 billion annually. Net profit margins, meanwhile, are in the high teens.
An intriguing growth catalyst is a bridge being built to connect Hong Kong and Macau, which is an improvement on the existing ferry system and should make the area more accessible for gamblers. Las Vegas Sands is also trying to appeal more to mass market gamblers (over VIPs), who deliver higher profit margins, and it is still spending billions annually to build more locations, particularly in Asia.
Why might you steer clear of Las Vegas Sands?
All is not perfect for Las Vegas Sands, however. In its third quarter, revenue slipped by 1% year over year, while earnings per share rose 9%. The shortfall came from casino sales, as its lodging, food and beverages, and mall businesses all grew. The drop in gambling might be a concern, but the company's diverse operations mitigated much of the pain.
The entire casino industry faces a threat in online gambling, a much less capital-intensive business with fewer barriers to entry. Las Vegas Sands and some others in the industry are fighting it, in part by pointing out that online gambling can hurt the poor more.
Meanwhile, growth in China could be slowing, which doesn't bode well for the gambling industry. Regardless, growth is likely to slow in future years as competitors open more establishments in Macau, where Las Vegas Sands bet big and profited handsomely. Growth could also slow due to an overall slowdown in gambling in the Chinese special administrative region -- Gambling revenue in Macau dropped 12% year over year in September, while revenue was down 5% on the Las Vegas Strip.
Sins aside, though, there's more to like than dislike about Las Vegas Sands as a profit-generating business. At recent levels, its stock is worth consideration.