It's a lousy year in Macau and Melco Crown (NASDAQ:MLCO) knows that more than anyone. The company gets 100% of its revenue and earnings from the gambling enclave and is directly affected by any weakness in the gaming market there, and weakness is exactly what we've seen. The last six months have seen negative year-over-year gaming revenue growth and for the full year Macau is just 0.3% above last year and trending downward.
This is a problem for Melco Crown's operations, but a new concern for investors is where the company's dividend is headed. Melco Crown introduced a dividend earlier this year and it could be in danger of being lower than previous payouts if gaming results are weak.
Melco Crown's dividend payout is key
Unlike most companies, Melco Crown hasn't set its dividend at a level that will stay steady every quarter, choosing instead to pay out 30% of net earnings each quarter. This gives management flexibility to raise or lower the dividend based on profits, but for investors it means dividends can fall if results are weak. In the last three quarters the dividend has gone from $0.129 to $0.078 to $0.072 per share as results have declined.
Investors should expect the same in the fourth quarter because gaming revenue in October was down 23.2% from a year ago and November fell 19.6% to the lowest level since September 2012. The drop will directly impact Melco Crown's bottom line and therefore its dividend payout.
Growth opportunities yet to open their doors
One of the reasons earnings -- and the dividend -- will drop despite the company's investing millions into new projects is that those projects aren't open yet. City of Dreams Manila will have a soft opening this month and is slated to be fully open for Chinese New Year next year. Studio City in Macau -- which still hasn't been approved for table games -- is due later in 2015.
These new properties could bring earnings growth, even if Macau's revenue is falling, but they won't hit the income statement in time to make a meaningful impact on fourth-quarter results and will have little impact until late in 2015.
Melco Crown's dividend is in danger
I'd be shocked if Melco Crown wasn't profitable in the fourth quarter of 2014 and in the first half of 2015, so its dividend isn't in danger of going away. But it is definitely in danger of falling and the drop could be dramatic in the next three quarters because of falling earnings in Macau.
Keep in mind that Melco Crown should be looked at as a long-term dividend play and on that front it's set up well for success. City of Dreams in Macau is highly profitable, the company has a balance sheet that's the envy of the industry, and expansions in the Philippines and Macau have yet to begin operations.
As Macau's gaming market settles out and growth opportunities play out I think the dividend will rise again. Just don't expect it to be stable short-term because Macau is running into its own bad luck at the moment.