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ROI Comes in Many Forms

Share repurchases and dividends are ways companies can create value for their investors

ROI Comes in Many Forms

After decades of being a growth industry where investors focused on return on capital, brick-and-mortar gaming has become a more mature place where many also seek a return of capital, namely share repurchases and cash dividends.

That is not to say that growth is no longer important. For many gaming companies, growth is the primary strategy. Consider Churchill Downs and Boyd Gaming with their incremental, almost inexorable, expansions. Or look at Red Rock Resorts, which pays a nice dividend yet is financing a long-term growth plan to fully maximize its potential in one of America’s fastest-growing and increasingly affluent metropolitan areas, the Las Vegas Valley.

Repurchases

Share repurchases have become one of the favorite forms of returning capital to shareholders.

The attractions are obvious. For one, buybacks have flexibility and opportunistic qualities. The number of shares repurchased can be raised to take advantage of lower stock prices or reduced to save money for investment when growth opportunities come along. And repurchases can be halted with less consternation, or damage to the stock price, than slashing or omitting a cash dividend.

The rationale is that repurchases amount to a free and non-taxable increase in each shareholder’s ownership of a company, thus enhancing earnings per share.

Unfortunately, the promise of a larger ownership stake in too many cases turns out to be, in effect, a lie. Too many companies spend money to buy back shares only to dilute, or completely undermine, the stated purpose of building shareholder value by granting overly generous stock options to management, even to the point that some companies actually grow the share count.

Such abuses give share repurchases a bad name and lead to proposals such as that to tax buybacks.

Fortunately, gaming companies buying back shares have met the letter and the spirit of the intention. Boyd, for example, has reported that the fourth quarter’s average number of diluted shares had been reduced to 105.6 million from 114.1 million a year earlier. Year-end share count was down to 102.8 million. (Boyd promises $600 million in return of capital—$400 million in repurchases and $200 million in cash dividends.)

Dividends

Dividends, while sometimes criticized because proceeds are taxed as income, have the advantage of putting money into the pockets of investors who can decide for themselves what to do with it.

Dividends are also subject to less manipulation and sleight of hand. You know what you get.

One good way to return capital is Boyd’s balanced approach of both buying back shares and paying dividends.

Red Rock provides flexibility to dividends by paying both recurring and special ones. That allows the company to reward shareholders while keeping recurring dividend costs low enough to avoid having to reduce payouts during hard times while also saving money to invest in growth opportunities.

Red Rock pays $1 a share annually in recurring dividends for a 2.2 percent yield while its recent $1 special dividend doubled the yield to 4.4 percent, a nice return in these inflationary times. If the company wants to save money in hard times or to finance acquisitions, it can lower or omit the special dividend without upsetting investors in the way done by cutting or suspending the recurring payout.

For investors who are not buyback enthusiasts, the combination of recurring and special dividend is ideal.

The biggest recent splash on this front came from Monarch Casino. Almost on cue (as within two working days of our column mentioning the possibility), the company announced a special dividend to be followed by a recurring quarterly dividend.

The large special dividend will be $5 a share. The recurring dividend will be 30 cents a share each quarter. Annualized, the regular dividend yields 1.5 percent. Combined with the special dividend, that’s a 7.7 percent yield in the coming four quarters.

With EBITDA over $180 million a year, and the recurring dividend costing under $25 million, Monarch will continue to pile up cash even while rewarding shareholders.

Now, to be complete, we need Golden Entertainment to follow through on our speculation in that column.

Golden will sell its Maryland casino for $260 million this year, meaning that, even after taxes and with around 30 million shares outstanding, it could pay a very nice special dividend. And with a strong balance sheet and EBITDA well exceeding planned capital investments, the company also could initiate a recurring dividend.

Let’s Not Forget the Guys from Down Under

No discussion of dividend-paying gaming companies would be complete without mentioning Aristocrat Leisure.

Every generation, it seems, has a dominating games company—Universal, Bally, IGT. Today, it is Aristocrat.

Aristocrat’s stock has risen 44 percent in the past five years and its dividend currently yields 1.4 percent. Analysts expect 15 percent stock growth this year.

For truly long-term holders, Aristocrat has been a stock to grow rich on. Shares are up 5,200 percent since the late 1990s—and 68 percent just since the Covid-caused stock market collapse of March 2020.

Impressively, Aristocrat not only maintains its successful slot games culture, but has moved into both real money and casual online gaming in both casino and role-playing genres in ways that suggest its run is far from over.

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