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What’s the Best Macau Gaming Dividend Stock?

In gambling, the more customers, the better. And nowhere is there more people than in China, the world’s most populous nation. Due to gambling being illegal in Mainland China, and Macau’s proximity to the nation, the former Portuguese enclave and current Special Administrative Region (SAR) of China has an abundance of casinos overflowing with customers.

Among Macau’s major listed casino companies are Wynn Macau (SEHK: 1128), MGM China (SEHK: 2282), Sands China Ltd (SEHK: 1928), and Galaxy Entertainment Group (GEG) (SEHK: 27).

With unbelievably strong cash flows, these stocks have become known for their income-generating ability. But for investors, which is the best Macau casino stock in terms of its dividends?

Macau weakness

Although Macau is the largest gambling hub in the world, business in the city has slowed due to the macro weakness in China’s economy. Recent negative Chinese state media coverage on a major Macau junket operator has also hurt demand from the VIP segment as well.

After declining just 0.5% year-on-year for the first half of 2019, casino gross gaming revenue in the city declined 8.5% year-on-year to 22.9 billion Macau patacas (US$2.8 billion) in November. Although the decline was better than what many analysts were expecting, the results were worse than October’s 3.2% year-on-year contraction.

Due to the weakness, dividends of Macau gaming stocks next year could be lower than what they are currently if demand remains soft. The upside is that many of Macau’s casinos are expanding or renovating their operations that could increase profits in the future.

Another factor to keep an eye on for dividend investors is the renewal or a potential increase of concessions that allow the casinos to operate in Macau. Although most expect the status quo to remain, the current concessions will expire in 2022.

So let’s take a look at the different Macau gaming stocks in terms of their dividends.

Dividend yield

On the dividend yield front, MGM China has the lowest yield of around 1.1%, while Sands China and Wynn Macau have dividend yields of around 5.4% and 5.3% respectively.

Due to its paying a special dividend of HK$0.46 per share in 2019, Galaxy Entertainment has a historical yield of around 1.63%.

Winner: Sands China

Dividend growth

Because management of Wynn Macau, Galaxy Entertainment, and MGM China have all adjusted their dividends reflexively to its earnings, their dividends have fluctuated sometimes wildly over the past five years.

As a result, the fluctuations have not resulted in any meaningful dividend growth trends for the three companies. Sands China’s dividend has remained the same for the past five years at HK$1.99 per share.

Winner: Sands China

Payout ratio

In 2018, Wynn Macau’s payout ratio was 21.4%. A better indication of Wynn Macau’s dividend sustainability might be its trailing 12-month (TTM) payout of 66%.

In 2018, MGM China’s payout ratio was 46%. In terms of the TTM, its payout ratio is even lower. Because Galaxy Entertainment pays a special dividend rather than a normal dividend, using a payout ratio on it isn’t particularly relevant.

Aa for Sands China, its 2018 payout ratio was 108%. Although Sands China paid 8% more in dividends than what it made in terms of EPS last year, the stock’s moderate dividend yield indicates that most investors expect Sands China’s future expansions and renovations to bring in enough earnings to cover the gap.

Winner: MGM China

Valuation

Given that past earning per share (EPS) results can be affected by one-time items, many use forward price-to-earnings (PE) ratios as a valuation metric to judge stocks rather than the traditional PE ratio. In terms of forward PE valuations, Wynn Macau is the cheapest – sporting a forward PE ratio of 13.6.

MGM China is not far behind at 13.8. Sands China has a forward PE of 17.2 while Galaxy Entertainment has a forward PE ratio of 17.5.

Winner: Wynn Macau

Foolish conclusion

Due to the weakness in gaming sales and the uncertain macroeconomic conditions in China, I don’t think Macau casinos are the best dividend stocks at the moment. Many have uneven dividend payout histories and the yields of many aren’t as attractive as the yields of other dividend stocks available in the Hong Kong universe.

Between the major Macau casinos, however, Sands China has the most attractive qualities in terms of its dividend consistency and yield.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.