AMM Dividend Letter Issue 2: An Enduring Income Stream & Wynn Resorts (WYNN)
This is from the AMM Dividend Letter released November 30, 2013. If you want to see the latest “Dividend Stock in Focus” as soon as it’s released then join our mailing list here.
Investors in commons stock are able to earn a cash return on their investment either through 1) selling all or a portion of their stock and realizing a gain, or 2) via dividends received from the company. It is important to distinguish cash return from unrealized “paper gains”, since investors can only spend cash.
A key goal of our Dividend Strategy is to maximize the growth in cash return via dividends. Companies that have a policy of consistent dividend growth reward their shareholders with a pay raise every time they increase their dividend. Ultimately, long-term investors in these kinds of businesses are able to build a growing stream of income for future years, while also benefiting from capital appreciation over time. Below we outline the 3 core building blocks for constructing this kind of portfolio:
- Seek to invest in quality businesses. We define quality as the ability to generate a high rate of return on capital invested, and possessing a high degree of financial strength.
- Since the price you pay for anything is the ultimate determinant of your return, we seek to invest at fair or, ideally, bargain prices.
- Finally, we seek to invest in companies with current dividend policies in place, and the ability to grow the dividend over time.
Dividend Stock in Focus
Wynn Resorts (WYNN): $165.87*
Wynn Resorts (WYNN) owns and operates luxury casinos in the United States and China. The company was founded in 2002 after Steve Wynn sold Mirage Resorts, his previous hotel and casino company, to MGM Grand for $6.6 billion. Following the sale, he went on to purchase the Desert Inn Hotel, demolished it, and then built his namesake hotel and casino the Wynn Las Vegas which opened in 2005. In December 2008, the second Wynn hotel, Encore Las Vegas, opened next door to the Wynn Las Vegas.
Wynn Resorts also owns and operates two luxury hotel and casinos in Macau (a Special Administrative Region of China): the Wynn Macau and the Encore at Wynn Macau. Wynn Resorts is currently constructing another luxury hotel and casino in Macau, the Wynn Palace, along the Cotai Strip.
In May 2010 WYNN started paying a regular quarterly dividend of $0.25 per share. WYNN has increased its dividend every year since and currently pays a quarterly dividend of $1.00 per share. WYNN will pay a total of $4.00 per share in FY 2013 (not shown in chart below), a total growth rate of 300% and a 4 year compound annual growth rate of 41% for the quarterly dividend.
On November 5, 2013 WYNN announced another increase to its quarterly dividend for fiscal year 2014. The quarterly dividend will increase to $1.25 per share boosting the dividend yield to 3% based on its current share price around $165.
WYNN is also known for paying out a special dividend. Every year since 2006, except for 2008, WYNN has paid out a special one time dividend.
- 2006 = $6.00/share
- 2007 = $6.00/share
- 2009 = $4.00/share
- 2010 = $8.00/share
- 2011 = $5.00/share
- 2012 = $8.00/share
Again, On November 5, 2013 WYNN announced another special dividend of $3.00 per share to be paid on December 6, 2013 to shareholders of record as of November 20, 2013.
3 Catalysts for Dividend Growth and Price Appreciation:
Macau was once a Portuguese colony that was returned to China in 1999. Macau and Hong Kong are the two Special Administrative Regions of China; however Macau is the only region where gambling is legal. Its location places it right next to one of the world’s largest concentrations of potential gaming customers and WYNN is one of the few hotel casino operators with access to this market.
Prior to 2002 gaming in Macau was permitted as a government-sanctioned monopoly with a single concessionaire. Then in 2002 the government of Macau granted 3 more concessions for the operation of casinos and Wynn Macau was one of those 3 concessionaires.
WYNN is currently the premier luxury brand in Macau. By focusing on the VIP market WYNN is able to attract customers who pay higher room rates and bet more per hand at the tables. WYNN consistently generates the highest revenue and EBITDA per table amongst its competitors**.
In 2016 WYNN will open its latest Macau casino on the Cotai Strip, the Wynn Palace. Once opened the Wynn Palace will effectively double WYNN’s gaming tables and add another 2,000 rooms. The Wynn Palace has accounted for a high degree of capital expenditures at WYNN, however upon completion of the Palace in 2016 we expect the excess Free Cash Flow to go to increasing both quarterly and special dividends.
Ultimately, high barriers to entry for new competitors plus the ability to charge premium prices allows WYNN to generate high excess returns on its Chinese properties.
WYNN shareholders are investing right alongside Steve Wynn who owns 9% of the company. From 1973 to 2000 Steve Wynn generated annualized shareholder returns of 24.9% for his previous company Mirage Resorts**.
As the largest shareholder Steve Wynn is highly incentivized to repeat his past performance. In the last 5 years, with “Steve” at the helm, WYNN has grown its Return on Equity (ROE) to 62% and its Return on Capital (ROC) to 11%.
It appears in 2014 legislation will be introduced to legalize gambling in Japan, another potentially large gaming market. WYNN is currently in talks with representatives in Japan. Nothing more has been said as the talks are preliminary at this point. Still, this fledgling opportunity further highlights WYNN’s brand strength and global reach, and could provide a boost to shares if a Japanese deal comes to fruition.
Our fair value estimate for WYNN is $195 per share based on a discounted cash flow analysis. At current prices, we view WYNN as a high quality, dividend growth company trading at a discount price.
* Price as of the close November 29, 2013
** Per Morningstar