Many founder-led companies can make for solid long-term investments, specifically when it comes to dividend stocks.

 

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That’s because the founder and CEO owns a large stake in the business and often has a natural incentive to pay a generous and growing dividend, an appealing proposition for income investors seeking to live off dividends.

 

However, that doesn’t necessarily mean that all such companies are worth owning. After all, the ability to pay a secure, growing dividend largely depends on the business model of each company.

 

Let’s take a closer look at Las Vegas Sands (LVS), which is run by its founder, Sheldon Adelson, who along with his wife Miriam own 20% of the company’s shares worth over $9 billion.

 

Given the high levels of insider ownership, let’s see if Las Vegas Sands’ high dividend could be worth a roll of the dice for our Conservative Retirees dividend portfolio.

 

Business Description

Founded in 1988 in Las Vegas, Nevada, Las Vegas Sands is the largest publicly traded casino operator in the world.

 

It owns 12 major hotel and gaming resorts, as well as convention centers in three countries on two continents.

  • The Venetian Macao (China)
  • Sands Cotai Central (China)
  • Parisian Macao (China)
  • 4 Seasons Macao (China)
  • Cotai Strip (China)
  • Plaza Casino (China)
  • Sands Macao (China)
  • Marina Bay Sands (Singapore)
  • Venetian (Las Vegas)
  • Palazzo (Las Vegas)
  • Sands Expo and Convention Center (Las Vegas)
  • Sands Casino Resort (Bethlehem, Pennsylvania)

As you can see, fully two thirds of Las Vegas Sands’ properties are located in Asia, with 58% being located in Macau.

 

Macau is the world’s largest gaming market ($30 billion in 2016 gaming revenue), and the only place where gambling is legal in China.

 

 

In fact, Macau is by far the company’s most important source of sales, earnings, and cash flow.

 

Las Vegas Sands LVS Dividend

Source: Las Vegas Sands Earnings Presentation

 

While the company has started to diversify its revenue base away from pure casino gaming, thanks to its world-class hotel, food, and retail facilities, Chinese gambling remains the overwhelming source of the company’s business, making up 59% of sales in 2016.

 

Business Segment 2016 Revenue % Of Revenue
Gaming $8.8 billion 71.9%
Hotel Rooms $1.5 billion 12.5%
Food & Beverage $774 million 6.3%
Malls $591 million 4.8%
Retail & Convention $533 million 4.4%
Total $12.196 billion 100.0%

Source: Las Vegas Sands Earnings Release

 

Business Analysis

Gaming is a purely discretionary industry, which means that sales, earnings, and free cash flow can be highly volatile.

 

That’s especially true for Las Vegas Sands because it’s so heavily dependent on Macau, which saw gaming revenues collapse in 2015.

 

The collapse was due to a strong corruption crackdown that scared away big gamblers (many of whom were Communist Party Officials and/or wealthy Chinese who the government has accused of using Macau to hide wealth offshore) and plunged the local economy into a depression.

 

Las Vegas Sands LVS Dividend

 

This had a noticeable impact on Las Vegas Sands’ margins and returns on shareholder capital, which can also fluctuate largely over time thanks to various needs for profit-sapping promotions ($786 million in 2016).

 

While the company’s profits have taken a hit in recent years, thanks to both highly disciplined management, as well as owning some of the highest quality properties in the world (almost all of its resorts are 4 and 5 stars), Las Vegas Sands still boasts far better than average profitability relative to its peers.

 

Company Operating Margin Net Margin FCF Margin Return On Assets Return On Equity
Las Vegas Sands 21.9% 14.6% 22.8% 8.1% 25.7%
Industry Average 4.0% 1.8% NA 0.8% 5.1%

Source: Morningstar

 

That’s thanks in large to management refusing to invest in new overseas growth properties (in China, Singapore, South Korea, and Japan) unless it thinks it can achieve a long-term return on invested capital of at least 20%.

 

In addition, Las Vegas Sands benefits from good exclusivity in some of its regions. For example, in Singapore it has one of only two gaming licenses issued by the government, which allows its Marina Bay Sands resort to generate 50% EBITDA margins.

 

Meanwhile, an increasing focus away from big VIP gamblers and instead on families and smaller gamblers has resulted in a turnaround in both visitors and gaming revenue from Macau over the past year.

 

Las Vegas Sands LVS Dividend

Las Vegas Sands LVS Dividend

 

Further good news for shareholders is likely to come from the long-term growth prospects of Macau, which is expected to see continued strong increases in visits from mainland China thanks to the fast growth rate in Chinese middle class spending.

 

Las Vegas Sands LVS Dividend

 

That’s especially true given that in 2016 just 1.5% of the population of China visited Macau.

 

In contrast, last year 12.7% of Americans visited Las Vegas, indicating enormous growth potential for the company’s Macau properties should China’s populace prove as gambling-friendly as its U.S. counterpart.

 

Better yet, because of its dominant position in Macau’s four and five star resort market, Las Vegas Sands is arguably best situated to profit from future Chinese gaming growth.

 

Las Vegas Sands LVS Dividend

 

In other words, Las Vegas Sands, due to its increasing focus on Asian gaming growth potential, appears to be one of the best stocks you can own to profit from the future of global gambling.

 

However, that doesn’t mean that it is necessarily a good dividend stock, especially not for investors who need consistent and dependable income.

 

Key Risks

While there’s plenty to like about Las Vegas Sands, investors need to realize this company faces several major risks.

 

First, remember that, as with the gaming industry in general, the fortunes of Las Vegas Sands rise and fall with the global economy. Any economic downturn can result in a sharp decrease in revenue, profits, and free cash flow.

 

This is especially true in China, where not only has the economy been slowing lately, but also regulatory threats are a constant concern.

 

For example, while Macau gaming has had a nice recovery in 2016, in recent months it appears that this trend may have run out of steam.

 

Las Vegas Sands LVS Dividend

Source: MACAU GAMING INSPECTION AND COORDINATION BUREAU, Motley Fool

 

Worse yet? Beijing recently clamped down yet again, cutting in half the amount of cash that one is allowed to withdraw from an ATM per transaction.

 

In addition, China recently started requiring all foreigners to get fingerprinted when entering the country. This was a result of concerns that wealthy gamblers were using Macau (which has its own

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