Source: Wynn Resorts.
Anyone expecting Wynn Resorts, Limited (WYNN +0.34%) to report great earnings in the first quarter hasn't been watching how bad conditions have gotten in Macau, Wynn's biggest market. Wynn reported earnings Tuesday after market close. Macau's gaming revenue dropped 36.6% in the first quarter versus a year ago and Wynn's typical VIP customers have been the hardest hit.
But news that Wynn would cut its dividend from $1.50 per share per quarter to $0.50 per share per quarter has hit the stock hard after hours. It's a shocking reduction and here's a look at Wynn's numbers and why I think the dividend cut was the right move.
Macau hit hard
First-quarter revenue in Macau was down a whopping 37.7% to $705.4 million, slightly more than the gaming market as a whole. Adjusted property EBITDA, a measure of cash flow from a casino, fell 44.7% to $212.3 million, in part because Wynn didn't go through major cost cuttings in an effort to keep service levels high at the resort.
The biggest negative segment was a 52.4% decline in VIP table game turnover to $17.1 billion in the quarter. The decline in VIP play was offset by a much lower decline of 7% in mass market win to $279.6 million, where Wynn is trying to win new business from competitors. Slot handle fell by 25.7% to $1.04 billion in the quarter.
While gaming was down dramatically in Macau, average daily room rates at the hotel dropped just 2.1% to $331 per night, although non-casino revenue fell 21.8% to $88.4 million.
The decline in Macau is something we'll see across the gaming industry this quarter. What'll be key to watch as the year goes on is whether gaming revenue stabilizes at current levels or continues to decline.
Las Vegas was better, but not great
Most of the relatively positive news from Wynn today came from Las Vegas. Revenue on The Strip increased 1.6% to $380.9 million and adjusted property EBITDA increased slightly from a year ago to $110.7 million.
But Steve Wynn was quick to keep expectations low for Las Vegas. On the conference call he said, "We would be thrilled if non-casino revenue is flat in the second quarter".
It looks like zero growth is the high end of expectations in Las Vegas right now, which is a change from a steady improvement since the recession ended.
Wynn Palace, which is expected to open in the first quarter of 2016. Image source: Wynn Resorts.
Growth plans move to the forefront
Anyone buying shares of Wynn Resorts now has to look at its two new resorts as the best catalysts the company has going forward. Wynn Palace in the Cotai region of Macau is expected to open in the first quarter of 2016 and bring 1,700 new hotel rooms and Wynn hopes around 500 gaming tables to the portfolio. At a cost of $4.1 billion it's a big bet but remember that the smaller Wynn Macau just produced $212.3 million in EBITDA in a bad quarter, so financial returns will still be very good.
The company's project in Everett, Mass., is just getting off the ground so there weren't any big announcements, but this is another project that will expand the revenue base and give further diversification.
Doubling the number of casinos in Wynn Resorts' portfolio may be coming at a bad time but long-term I think it'll pay off big for investors.
When a dividend cut is good for investors
On the conference call, Steve Wynn was adamant that he wouldn't use debt financing to pay for a dividend, which is something a lot of companies do just to keep up the appearance of a consistent dividend. That may not be what investors want to hear, but I think it's the right move for the company long-term.
Consider that Wynn Resorts will be investing over $5 billion in new resorts over the next two years in an effort to grow, which puts a squeeze on cash in the meantime. Paying a dividend in the face of those financial obligations wouldn't be the right thing to do.
Investors often get over-accustomed to a certain dividend payout and Wynn Resorts has typically increased what it's paid, so this is uncharted territory. But with the backdrop being what it is I have to say it's the right move, and I'm a shareholder.
I continue to believe this will be a solid investment in gaming long-term because Steve Wynn has an eye on long-term value creation, but he's willing to give up short-term gains to achieve that long-term vision. We saw that today and the market didn't like it, but it's the kind of vision Foolish investors should love in a leader who knows what he wants to achieve long-term and is willing to make difficult decisions to get it done.
