If you know anything about casinos, you’ve likely heard the saying “The house always wins.” Typically, that’s true.
But look at a stock chart of hotel and casino operator Wynn Resorts (Nasdaq: WYNN), and you’ll see it resembles the stack of chips belonging to a blackjack player who’s been sitting at the table for hours downing Jack and Cokes.
Take a look below. No doubt Wynn Resorts would like to have a few more of those players at its tables.
Wynn Resorts has two properties on the Las Vegas strip and another in Macau, China. In fact, the company generates 70% of its revenue from Macau, where it caters to VIPs and wealthy tourists.[ad#Google Adsense 336×280-IA]In 2014, revenue and net income fell 3% and 4%, respectively.
Not surprisingly, cash flow from operations was also down.
Free cash flow (which is cash flow from operations minus capital expenditures) was negative due to a 165% increase in capital expenditures, as the company is building a new property in Macau.
Earnings and revenue are projected to drop in 2015 and then grow in 2016.
Free cash flow, however, is forecast to turn positive this year and then more than double in 2016.
So what does it mean for the safety of the dividend?
Well, we still need to dig a little deeper. The company has paid dividends since 2009. Only twice in that period has the dividend been covered by free cash flow. In five of the six years, cash flow from operations was greater than the dividend paid, though sometimes not by much.
Based on the company’s most recent $1.50 per share quarterly dividend, Wynn Resorts yields 4.7% on an annual basis. It has raised the dividend four out of the past five years – including the last three consecutive years – and gave the dividend a 20% boost in February.
But there’s another way to look at the dividend. Each November, the company pays a special dividend. That dividend has ranged from $7.50 per share in 2012 to $1.00 last November.
Including that $1.00 special dividend, Wynn Resorts’ yield goes up to 5.5%.
Cash flow isn’t likely to cover the dividend this year and although next year’s cash flow is expected to improve, it’s even more unpredictable than in other industries.
Adding to its volatility, the company has a lot of debt – $7.3 billion. That’s 27% more than it had just two years ago.
Wynn Resorts is also going through a nasty board fight. Founder Steve Wynn’s ex-wife Elaine has been a director for 12 years, but the board is seeking to block her from serving another term.
She is also suing her former husband over restrictions on her shares.
I don’t expect the battle in the boardroom to affect the dividend, but it is a wild card.
Considering Wynn Resorts’ cash flow issues, I think it’s quite possible that the company will cut its quarterly dividend in the next 12 to 18 months.
Wynn should also consider doing away with the special dividend until it can be paid out of free cash flow.
Dividend Safety Rating: D
Source: Wealthy Retirement