Image source: Las Vegas Sands.
The past several years have been tough for casino companies, and both Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS) have felt the pressure of poor performance in Asia's largest gaming market in Macau. After suffering terrible stock-price performance, investors are finally looking for signs of potential improvement in Macau, and that has spurred new hope among Wynn and Sands shareholders that the future could finally look brighter. Nevertheless, before making an investment, it's useful to know which stock looks more attractive right now. Let's look more closely at Wynn Resorts and Las Vegas Sands to see how they compare on some vital measures of business success.
Valuation and stock performance
Wynn Resorts and Las Vegas Sands have bounced back from the worst of their stock declines in recent years, and increased optimism about the prospects for stronger results in Macau has lifted their share prices recently. Over the past 12 months, Las Vegas Sands shareholders have enjoyed a 17% return, making back much of their lost ground from the previous year. Wynn has rebounded even further, up 23% since August 2015, but it is still well below where it traded five years ago.
From a valuation standpoint, there are compelling reasons to buy either stock. When you look at trailing earnings, the greater challenges that Wynn has faced have had a larger impact on valuation metrics. Currently, Wynn trades at almost 28 times trailing earnings, compared to a more modest earnings multiple of between 24 and 25 for Las Vegas Sands. However, investors expect a bigger rebound in earnings from Wynn in the immediate future. Therefore, when you incorporate forward earnings estimates into the valuation equation, Wynn gains an edge, trading with a forward multiple of between 18 and 19 compared to Sands' figure above 20. Based solely on simple valuation metrics, Wynn and Sands don't appear to have markedly different attributes.
Dividend investors can see a much clearer advantage between the two stocks. Las Vegas Sands pays a dividend yield approaching 6%, while Wynn's yield is much lower at around 2.2%.
It wasn't that long ago that the companies' yields were much closer to each other. Wynn made a strategic decision in early 2015 to reduce the amount it paid in dividends, cutting its quarterly payout by two-thirds. Essentially, Wynn favors having the earnings and cash flow to back up its dividends, and with extensive capital spending anticipated for new projects in Macau and in the Boston metropolitan area, it no longer made sense to sustain the dividend at its previous high rate. What Wynn investors should expect is a return to the company's previous strategy of making special dividend payments periodically, supplementing the regular quarterly payment and boosting the effective yield. A special dividend probably won't happen in 2016, but future years could bring renewed vigor to the payout.
Las Vegas Sands has maintained a different strategy with respect to its dividends. It remains strongly committed to sustaining regular quarterly payouts, and the casino giant made another double-digit percentage increase late last year despite the tough environment. Even though its payout ratio is currently above its earnings, Sands apparently believes that the temporary troubles that have held back its earnings recently will reverse themselves and make the payout more sustainable.
For risk-averse investors, Wynn's dividend more accurately reflects current earnings power. However, Sands still looks like the better stock in terms of producing income for investors' portfolios.
Growth prospects and risks
The casino industry is still facing major pressures, and Las Vegas Sands and Wynn Resorts are both working hard to overcome the negative impact on their financials. In its most recent quarter, Las Vegas Sands suffered a 9% drop in revenue that sent net income downward by nearly a third. All four of the company's Macau properties posted even larger drops in revenue, with all but the Venetian Macau experiencing double-digit percentage drops on the top line. As a result, Sands has lost market share, and with new resorts set to open in the near future, competitive pressure will only increase. Las Vegas Sands needs to push harder to retain its leadership role in Macau if it wants to be able to keep delivering the performance that shareholders have come to expect.
Meanwhile, Wynn Resorts' most recent report gave investors somewhat more confidence than they had had previously. The company actually increased its revenue by 2% compared to the year-ago quarter, with gains in sales at the Wynn Macau resort bucking the industry's overall trend. Sluggish performance from Las Vegas held back solid profit gains in Asia, and the company remains optimistic about the Wynn Palace project, which just recently opened. The Boston Harbor project remains in its early stages and will have extensive capital costs, but the company is working hard to make sure that it makes the most of all of its opportunities worldwide.
Different investors will prefer each casino stock over the other. For income investors, Las Vegas Sands is a clear choice as long as you're comfortable that the sector will keep improving. Thanks to the opening of Wynn Palace, Wynn Resorts has greater immediate growth prospects, and that could appeal to investors looking for a bigger prospective payoff even with higher risk.
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Dan Caplinger owns shares of Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.