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Aligned Interests

When the founder is in charge of any company, it bodes well for investors

Aligned Interests

In looking for long-term investments, I am partial to companies in which the founder, or the founder’s family, own controlling interests.

At many companies, the managers are mercenaries. They come and go. They talk about aligning their interests with those of shareholders, but that’s often a euphemism for deluging executives with millions and tens of millions of dollars in options, giving them nearly instant fortunes at the expense of shareholders who put their own money at risk for a slice of potential.

And when companies buy back shares, the talk is about benefitting shareholders, but in many cases the share base stays flat or even expands, meaning money was spent primarily to limit the dilution of generous options.

But in companies where the founder remains in charge and is a big shareholder, there is no question where loyalties reside.

With his heart and soul invested in creating and building the business, his interests aren’t just aligned with shareholders; he is a shareholder, and usually the biggest shareholder.

An investor gets another bonus with a founder-CEO. The company is run by the guy who has the vision and a record of success in fulfilling it.

In gaming, the best-known visionary founder-CEOs are Steve Wynn and Sheldon Adelson.

Wynn has given investors two opportunities to make a lot of money—originally with the Golden Nugget turned Mirage Resorts, and currently with Wynn Resorts.

Wynn Resorts went public at $13 a share a decade ago. Thus, investors have enjoyed a 1,000 percent appreciation.

Better yet, WYNN has dished out $40.50 in dividends, or more than three times the IPO price. That means there are investors who, in effect, are being paid to own the stock.

And with WYNN generating so much cash, those dividends are likely to continue. Indeed, the company is doubling its regular dividend to $4 this year and is likely to pay a special dividend again. Last year the special dividend was $7.50.

Las Vegas Sands has given investors less of a ride, thanks to the stock cratering in the financial crisis of 2008-2009.

But long-term investors have certainly enjoyed it since then, as the stock jumped from a low of $1.38 in March 2009 to more than $50 recently.

Dividends are part of the story here, too. LVS has paid out $3.75 since initiating its dividend a year ago. It also is a candidate to pay another special dividend this year thanks to Macau. And LVS has raised its regular dividend for this year by 40 percent to annualize at $1.40.

In the case of both companies, the CEO is rewarding himself with the dividends. Adelson’s regular and special December dividends, for example, put $1.2 billion in his pocket.

But those dividends put money into shareholders’ pockets, as well. Depending where you begin the calculation, shareholders got 7 percent to 8 percent in dividend yields last year. That can’t be beat in this low-interest-rate environment.

Another success story is Penn National Gaming, controlled by the family of Peter Carlino, who has been CEO since the one-time owner of a small Pennsylvania racetrack went public in 1994 and began transforming into the third-largest casino operator in the U.S.

Back then, the stock could be bought for under $2.50 a share. As of this writing, it’s over $48. And as it transforms again, this time into publicly owned operating and property companies, PENN will pay a $5.60 dividend for starters with likely annual payouts by the new REIT.

Of course, not all family-controlled companies fare as well.

And there are risks, such as the founder-CEO who still treats the public company as a private one, and as a personal piggy bank.

Perhaps the biggest risk is what happens on the inevitable day that the founder is gone.

It is a rare case when the next generation of management can maintain the founding visionary’s success, at least by replicating the model.

No one, for example, will ever design resorts with the meticulous care and artful insight of  Wynn. And those exquisitely designed resorts are the differentiating quality that makes a Wynn property a Wynn, and not just an expensive construction project.

The good news is that casinos are not gadget companies. Unlike Apple, where a swarm of competitors daily attack the unique appeals of iPhones and iPads, properties like Wynn and the Venetian will retain their allure for years.

In Wynn’s case, the company is building its next great resort to open in Macau in 2016 or 2017, meaning investors should enjoy at least several more years of Steve Wynn-inspired growth, if not more.

In Adelson’s case, integrated resorts and monetizing non-core businesses such as attendant shopping malls is a model that can be followed by a succeeding CEO, if the right person is chosen.

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