AMM Dividend Letter ~ Vol. 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:

  1. 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.
  2. Since the price you pay for anything is the ultimate determinant of your return, we seek to invest at fair or, ideally, bargain prices.
  3. 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*

Profile:

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.

Dividend History:

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.

Data from S&P Capital IQ
Data from S&P Capital IQ. Click to enlarge.

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:

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.

Steve Wynn:

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%.

Data from S&P Capital IQ. Click to enlarge.
Data from S&P Capital IQ. Click to enlarge.

Japan:

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.

Conclusion:

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

Chart courtesy of  Stockcharts.com.
Chart courtesy of Stockcharts.com.
The opinions expressed in “The AMM Dividend Letter” are those of Gabriel Wisdom, Michael Moore and Glenn Busch and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor who serves as a portfolio manager to private accounts as well as to mutual funds. Clients of AMM, Mr. Wisdom, Mr. Moore, Mr. Busch, employees of AMM, and mutual funds AMM manages may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice and is for educational purposes only. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything. Current stock quotes are obtained at http://finance.yahoo.com. Prices are as of the close of the market on the date for which the price is referenced.

SLM Corp: Upcoming Spinoff To Unlock Value

This is from the AMM Dividend Letter released October 31, 2013. If you want to see the latest “Dividend Stock in Focus” as soon as it’s released then join our mailing list here.

SLM Corporation (SLM): $25.37**

Profile:

SLM Corp. (also known as Sallie Mae) operates two distinct businesses related to the student loan industry: 1) Consumer Lending: originates, acquires, finances and services private student loans, and 2) Government Guaranteed Loans: manages a portfolio of private loans guaranteed by the government through the Federal Family Education Loan Program (FFELP). While the FFELP program was terminated in 2010, SLM Corp. continues to manage a FFELP loan portfolio of more than $118 billion on its balance sheet. Additionally, the company services loans owned by the Department of Education, and other guarantors of Federal Family Education Loan Program (FFELP) loans.

Dividend History:

From 1988 through 2006 SLM Corp. grew their dividend at a compound annual rate of 22% with only one annual reduction of the payout during the 2001 recession. However they reduced the dividend in 2007 and then eliminated the dividend completely from 2008 through 2010 as a result of the financial crisis. In 2011 they reinitiated a dividend of 30 cents per share and increased this amount by 66% to 50 cents per share in 2012.

Catalyst for dividend growth and price appreciation:

Earlier this year SLM Corp. announced that it will be spinning off its high growth, high return on equity private education loan business while the parent company will retain and manage its large student loan portfolio. The private bank, the spin off, will be named Sallie Mae Bank. The parent company will change its name to Education Loan Management. Splitting the company in two via a spinoff is a classic value creating strategy. Conceptually, the parts should be worth more than the whole, since investors can now value the high growth business independently of the operating performance of the slower growth business. The spinoff is expected to occur sometime in calendar year 2014. We outline the attributes of each post spinoff business below:

Education Loan Management (predictable cash flows, consistent return of capital to shareholders):

This entity will manage the cash flow from a student loan book that will amortize in 20 years and will remain the largest education loan servicer in the country. After accounting for operational expenses and discounting back the expected and reliable cash flows for the next 20 years we arrive at a value of $25 per share for Sallie Mae’s student loan portfolio. Ultimately, we expect Education Loan Management to return more capital to shareholders via share buybacks and dividends after the spinoff is completed. The potential exists for the value of Education Loan Management to increase if they are able to acquire more blocks of federally guaranteed student loans.

Sallie Mae Bank (high growth, high return on equity):

Sallie Mae Bank will retain the most recognized brand in the education loan industry, along with a leading market share (~47%) in private loan originations. We estimate the private bank business (the spinoff) is worth between $5-7 per share based on a comparison to similar publicly traded companies.

Based on our valuation analysis, the combined value of the two entities following the spinoff could be as high as $32 per share. Our 1 year total return target for this holding at time of our purchase was 25-30%***.

** Price as of October 31, 2013
*** Represents average price paid for clients invested in our Dividend Strategy. Depending on when a client joined the strategy they may have received a different price.

Image courtesy of Stockcharts.com.
Image courtesy of StockCharts.com.

The Importance of Dividends

From the most recent AMM Dividend Letter. Join our mailing list here.

Current Income to Owners:

Investors in common stocks own a pro-rata share of the companies in their portfolio and thus should think like owners. Many of our clients are business owners themselves, and once all expenses have been paid, and necessary funds have been retained for future growth, they typically pay a bonus or dividend to themselves. Large publicly traded companies effectively work the same way, they just have many more owners. While businesses may need to reinvest a portion of these profits for future growth initiatives, the remaining profits are available to pay out to shareholders in the form of dividends. While we don’t think companies should sacrifice growth just to pay a dividend, we do favor companies that have the ability to do both.

A History of Total Return*:

From 1926 through the end of 2012 stocks in the S&P 500 have annualized returns of 9.7% per year with 4.1% coming from dividends and 5.6% coming from capital appreciation. This ratio has varied over the years. In the 1940’s when stocks returned 9% per year, dividends accounted for wholly 2/3 of this return. In the lost decade of the 2000s, stocks in the S&P 500 annualized at negative .9% per year; however without the positive return of 1.8% provided by dividends, stocks would have lost -2.7% per year in the last decade. In all decades since 1926 dividends have provided an important component to a stock investor’s total return.

Not only do we like the long-term prospects of dividend paying companies, but we think the current environment is uniquely positioned to benefit companies with rising dividend prospects. Research from Pew suggests that approximately 10,000 baby boomers are retiring every day. With interest rates on high quality investment grade bonds at generationally low levels, retirees and those investing for retirement are looking for ways to increase their income in retirement. Blue chip dividend paying stocks that offer both income and growth potential appear well suited for this challenge.

* Data points in this section provided by: Standard & Poor’s, Ibbotson & J.P. Morgan Asset Management