Wynn Resorts (NASDAQ:WYNN) could be a very strong dividend bet. In the most recent quarter, Wynn management raised the quarterly dividend payouts, and also announced a special dividend of $1.00. The stock now pays $6.00 per share per year.
Wynn Resorts has a dividend yield of 4.1%, the highest in the industry, ahead of the next closest Las Vegas Sands (NYSE:LVS), at 3.5%, and MGM Resorts International (NYSE:MGM), which doesn't pay a dividend. Wynn management has been steadily raising dividend payouts since 2010, and has consistently paid special dividends during the past five years. All of this looks great for Wynn as a dividend buy. However, the special dividend paid this year is far below that of previous years, and the high payout ratio, at around 95%, according to Yahoo! Finance, may not be sustainable as Wynn continues to struggle to maintain growth. Here are the two things dividend investors need to know before investing in Wynn based on its dividend.
1. Special dividends are getting smaller
Wynn recently raised its quarterly dividend $0.25, putting it at $1.50 per share each quarter. However, during the last few years, the company's payment of special dividends has made a much bigger difference for income investors than regular dividends.
In recent years, special dividends were as high as $8.00 a share (2010 and 2012). However, last year the special dividend was only $3, and this year it was only $1.
While the company has been a great bet for dividend investors based on the yearly special dividend that the company has consistently announced around Q3 for the last five years, a large special dividend may not be sustainable. Small special dividends like this year's might be the case for the next couple of years -- if special dividends are paid at all -- as Wynn is struggling to keep growing at rates it saw in the last few years.
2. Wynn's payout ratio may not be sustainable
Wynn's payout ratio now sits at 95% of earnings, including special dividends. This incredibly high payout ratio might be unsustainable. Wynn saw massive growth in the last few years as the company made huge gains in Macau. The company was so profitable that returning such a high amount of earnings to shareholders wasn't impeding to its growth, and it could consistently raise dividends.
Wynn has had a tough 2014, with total revenue down 1.5% year over year in the most recent quarter, and earnings growth well below what it has seen in prior years. This high payout ratio looks inflated now due to dividend increases and lowered earnings growth. Wynn will need to focus on growing again, and it's likely that this high payout ratio might not be sustainable as the company needs to reinvest in itself instead of growing dividends.
One growth project that we know is going to eat up a lot of the company's money in the next two years is the Wynn Palace resort being built in Macau. Macau revenues have put a strain on the company this year, but long term, Macau still looks like a great bet on mass market gamers.
Wynn's new resort on the Cotai strip could be a new profit driver in years to come. Still, consider that costs and the need to reinvest in the company in the next two years as this property comes online may mean that we see no increases in regular dividends, and a lowered payout ratio going forward.
Should income investors still bet on Wynn?
Overall, Wynn has been very generous to shareholders in terms of returning capital through dividends. During times of growth, Wynn looks like a great dividend bet.
But with competition from Las Vegas Sands in Macau and MGM Resorts in Las Vegas, Wynn Resorts might have a hard time getting back to the amazing growth it had in the four years before 2014. Until there's reason to bet on the company growing again, buying Wynn based on its dividend history might not be a great move.
Bradley Seth McNew owns shares of Las Vegas Sands. 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.