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Storm Warnings

What do tropical storms, dividends and an up-and-coming company have in common?

Storm Warnings

Sometimes, things happen that you cannot predict.

In investing, they are called exogenous events. They disrupt the business model but, because they come from outside an organization and cannot be predicted, they are not factored into the model or financial forecasts.

This year’s hurricanes were exogenous events.

There is no way to predict in any year that a hurricane will hit any property, so financial forecasts do not include them. Yet, we know that every year hurricanes will happen, and the probability is that a storm will disrupt business somewhere in any year, and eventually everywhere in the nation’s hurricane zones.

Historically, storms have had varying effects on casinos. Hurricanes Rita and Katrina shut some properties permanently. Superstorm Sandy slammed Atlantic City business for a time.

However, the storms were not entirely bleak news for casinos. Those that remained opened after Katrina, for example, boomed with their near-monopoly status and flood of spendable money in the pockets of thousands of recovery workers.

Perhaps the bigger lesson is that it did not take long, in terms of a long-term outlook, for business to return to normal.

So, for long-term investors, it really is the long term that matters.

Total Return

If you want evidence that the casino industry is maturing, one big piece of evidence is in dividends.

Not long ago, dividend payers were rare. Not today.

As growth has slowed, thanks to casinos filling in, even saturating existing jurisdictions, and as balance sheets improve, in part because there are fewer growth projects to finance, companies find themselves with surplus money.

Some of that money is going to share repurchases. And, increasingly, to dividends. Or to both.

MGM Resorts and Boyd Gaming are the two latest companies to join the club. Both, until recently, had balance sheets that concerned investors. Now, both are headed towards debt-to-EBITDA ratios considered comfortable.

The result: MGM initiated a dividend that annualizes to a 1.3 percent yield and is buying in shares. Boyd initiated a dividend that yields 0.75 percent, and is buying shares.

Another relatively new source are gaming real-estate investment trusts—Gaming and Leisure Properties, spun off from Penn National, and more recently MGM Growth Properties, spun off from MGM.

Because REITs are required to pay out most profit to shareholders, the dividends, naturally, are larger. MGP is yielding about 5.5 percent and GLPI 6.45 percent. That’s a pretty good return in today’s low-interest environment, especially as a way to continue to invest in the long-term growth of gaming.

Among conventional casino companies, the biggest dividend payer is Las Vegas Sands at 4.6 percent yield. And with no major growth projects in the near future and CEO Sheldon Adelson famously crowing “Yay, dividends!” on quarterly investor conference calls, those returns to shareholders are likely to grow.

Some suppliers pay dividends, too. IGT at 3.9 percent yield, and Aristocrat at 1.4 percent, as examples.

All of that brings gaming into the world of total return—stock price growth combined with dividends.

Total returns tend not to be as exciting as pure growth, as in the casino industry’s early days. But as Jeremy Siegel documented in his classic book Stocks For The Long Run, they treat long-term investors the best.

Boyd, A Steady Grower

We’ve mentioned Boyd Gaming several times in this space as a company that appears to have a steady growth plan.

The company recently demonstrated in its second quarter that, while earnings missed analyst consensus, overall performance and corporate activities showed underlying strength.

Among the positives:

  • Operating margins in the Las Vegas locals markets improved 3.3 percent in the quarter. Part of the rationale for buying Cannery, East Side Cannery and Aliante casinos is that they operated at low margins, which Boyd can improve.
  • Returning capital to shareholders. BYD initiated a 5-cent quarterly dividend, bought back 600,000 shares in the quarter and intends to complete the remaining $77 million in buyback authorization in 12 to 18 months.
  • Lower debt. Boyd had paid down $92 million in debt this year and expects to get its debt-to-EBITDA ratio into the four-to-five-times range next year.
  • Property improvements. While Boyd is paying down debt, it is also investing in upgrading properties, a necessary move for growth.
  • Las Vegas Valley. Gaming revenue growth in the Las Vegas Valley appears to be accelerating.

Unlike most states, Nevada reports revenues by area, not by property, but July numbers suggest a strong month for Boyd.

With last year’s acquisitions, the Las Vegas Valley now generates about 45 percent of the company’s gaming revenue. The locals markets and Downtown Las Vegas grew revenues $25.122 million in July, a combined 12.07 percent. Assuming Boyd has 30-40 percent of those markets, and assuming it shared proportional growth, the inference is that BYD grew revenues by a healthy amount.

A combination of higher revenues and higher margins obviously means an even better bottom-line improvement.

Boyd stock is near its 52-week high and at 17 times next year’s earnings; it isn’t overly cheap. But it also isn’t expensive. And Boyd appears to be early in a story that will develop over several years.

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