Las Vegas Sands' gaming floor in Macau. Image source: Las Vegas Sands.
Shares of gaming giant Las Vegas Sands Corp. (LVS +0.82%) have had a rough start to 2016, falling 13.4% as of this writing. There's renewed fear that China's economy will slow in 2016 and that a continued crackdown on corruption will hurt gaming stocks.
But even if 2016 doesn't bring a recovery to Macau's gaming market, can we assume the company's dividend is safe?
Macau isn't as bad as it appears
The gaming market in Macau had a terrible 2015, falling 34.3%. But there's evidence we may be near a bottom, something investors don't seem to be pricing into shares. You can see below that gaming revenue grew slightly from Q3 to Q4, which is a far cry from the year-over-year declines.
|
Q3 2015 |
Q4 2015 | |
|---|---|---|
|
Macau Gaming Revenue |
$6.81 billion |
$6.87 billion |
Source: Macau Gaming Inspection and Coordination Bureau.
In the third quarter, Las Vegas Sands' Macau resorts generated $536.8 million in EBTIDA -- a proxy for cash flow generated by a casino -- a run rate of $2.15 billion. That may fall slightly in 2016 as competing resorts are opened, but I don't think Macau will have the disastrous year it had in 2015. And as long as Las Vegas Sands' overall EBITDA generation exceeds its dividend cost, the dividend should be sustainable.
Las Vegas and Singapore are
Macau gets most of the attention from investors, but Las Vegas Sands only owns 70% of Sands China, so cash flow from Singapore and Las Vegas are even more important. And they're both faring far better than Macau.
In the first three quarters of 2015, EBITDA for Marina Bay Sands in Singapore was down just 13%, compared to over 33% for every resort in Macau. And Las Vegas declined just 11.8%, primarily due to a drop in Asian gamblers.
Combined, Marina Bay Sands and the Las Vegas properties have generated $1.97 billion in EBITDA over the past year, a figure I think can rise in 2016.
Las Vegas Sands' dividend today
Based on management's announcement that dividend payments will be $0.72 per quarter in 2016, the stock yields an incredible 7.6% right now. But that also means the company will have to come up with $2.30 billion in cash flow to pay the dividend.
I've outlined above that EBITDA of $4.12 billion based on recently reported figures isn't an unreasonable assumption for the year. Even with some interest payments and taxes, the company can handle its current dividend yield.
While I don't think the 2016 dividend is in trouble, investors should watch to see if EBITDA stays well above the dividend payout. If it doesn't, the company will have to add debt to pay its dividend, which isn't a position any company wants to be in. For now, it looks like the dividend is as safe as any in gaming.
