Source: Las Vegas Sands.

Las Vegas Sands (NYSE:LVS) stock is paying a hefty dividend yield of more than 5% at current prices. This is quite an attractive return, especially because dividends have rapidly increased during the last several years. On the other hand, the company is facing declining revenues due to weak gaming demand in Macau. Is Las Vegas Sands an undervalued stock, or is the worst yet to come for investors in the company?

A falling price and a growing dividend
Las Vegas Sands has a generous and dynamic cash-distribution policy. The company has consistently raised dividends during the last several years, including a 40% dividend increase for 2013, a 42.9% hike for 2013, and a 30% raise for 2015. In addition, Las Vegas Sands announced a new $2 billion share buyback program in the fourth quarter of 2014, of which it has $1.7 billion remaining as of the first quarter in 2015.

However, the company is facing considerable headwinds lately. The Chinese government is limiting visas and travel permits to Macau in order to stop illegal money laundering via casinos in the region, and this is seriously hurting demand for gaming operators. Based on official statistics, Macau experienced a 37.1% decline in gross-gaming revenues during May, both on a monthly basis and when considering accumulated revenues in the first five months of the year.

While dividends are rapidly rising, the stock price is moving in the opposite direction due to investor concerns about the harsh environment hurting the company. Las Vegas Sands stock is down by almost 30% from its highs of the last year.

The good news is that the stock looks attractively valued at these levels, especially in terms of dividends. The dividend stands at $2.60 per year, which represents a dividend yield in the neighborhood of 5%. This is more than double the average dividend yield paid by companies in the S&P 500 index, in the area of 2.2%.

If the company can sustain dividend growth in the coming years, the recent decline in Las Vegas Sands could be offering an attractive entry point for investors.

Is the dividend sustainable?
Las Vegas Sands brought in $4.8 billion in operating cash flow during 2014. Capital expenditures absorbed 1.18 billion through the year, so free cash flow was $3.6 billion. Dividends required $2.4 billion, or 67% of free cash flow, so the business produces more than enough cash to continue paying dividends without requiring any external financing.

Besides, capital expenditures are forecast to decline substantially in the coming years as the company completes the construction of its Parisian Macau resort -- from more than $2 billion in forecasted capital expenditures during 2015 to $1.5 billion in 2016, and only $700 million in 2016. This should free up a lot of capital, providing more room for dividend increases in the future.

On the other hand, Las Vegas Sands suffered a 24.9% decline in revenues during the first quarter in 2015, while property adjusted EBITDA fell by 29%. As long as this negative trend continues, it's hard to be too optimistic about the company and its dividends. The main question for investors in Las Vegas Sands is whether things will turn for the better, or will the company face a permanent decline in sales and earnings.

There's no sign of stabilization so far, so it's hard to make any predictions about timing. However, everything suggests that the slowdown in Macau should be temporary by nature. Consumption spending by the Chinese middle class is expected to amount to $10 trillion by 2030, and 200 million Chinese are expected to travel outside China by 2020. That's more than double the 97 million Chinese who traveled abroad in 2013.

Macau should be a major beneficiary from growing discretionary spending by the Chinese middle class during the coming decades. Las Vegas Sands will own a dominant 47% of all hotel rooms among gaming operators in the region by 2017. Once the regulatory environment becomes more friendly again, the company should be ready to capture a big chunk of the money flowing back to Macau.

Las Vegas Sands stock could remain volatile until demand in Macau starts improving. However, the long-term upside potential should more than compensate investors for the risks they are willing to take on an opportunistic bet in Las Vegas Sands at current prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.