MGM Grand dividend seen as historic for gaming industry

Gary Thompson

Tuesday, Dec. 14, 1999 | 11:07 a.m.

MGM Grand Inc. directors voted Monday to split the Las Vegas company's stock and begin paying dividends, moves that not only will broaden the casino operator's shareholder base but also signal a new phase in the evolution of the gaming industry.

Securities analysts lauded the actions, and Wall Street seconded their approval. MGM Grand stock was quoted at $47.75 a share, up $1.375, in midday trading today.

"MGM Grand continues to be the casino company most focused on returning capital to shareholders," said David Anders of Credit Suisse First Boston.

"We applaud MGM's actions and believe that this may be one of the principal reasons why investors have been willing to pay a premium for the company's stock."

With most new casino spending projects now completed, Anders said other companies generating large amounts of free cash flow "may follow MGM Grand's lead in aggressively returning capital to shareholders."

"We believe these two announcements are significant to the gaming industry in general and MGM Grand in particular, as they indicate that the gaming industry is maturing, with uses of capital becoming more limited," said Jason Ader of Bear Stearns & Co.

"We believe more gaming companies will begin to reward shareholders by returning to them capital in the form of cash dividends. MGM Grand is the first gaming company to declare a significant dividend, and we wouldn't be surprised to see other companies follow," Ader said.

In their precedent-setting actions Monday, MGM Grand's directors approved a two-for-one stock split, which will increase the number of shares outstanding to 114 million from the current 57 million as of Feb. 10.

They also voted a post-split 10-cent-a-share quarterly dividend, payable March 1 to holders of record Feb. 15.

The dividend declaration is significant for several reasons, not the least of which is that it's an action that can't easily be reversed. Once a publicly held company begins paying dividends, it must do so in perpetuity or face the wrath of investors.

It will also enable institutional investors that can't buy stock in companies that don't pay dividends to begin accumulating MGM Grand shares. And the split itself, by halving the price of MGM Grand stock, will attract more individual investors, as well.

"The board sat down and took a very careful look at our five-year plan and our cash-flow projections and what we plan to spend, and decided we were comfortable in returning some of the cash to our shareholders while we grow the company in excess of the market rate," Jim Murren, MGM Grand's chief financial officer, said today.

"This represents such a small percentage of our free cash flow and our net income that we can comfortably build everything we've talked about building -- and some things we haven't shared with the world yet -- and still fund the cash dividend and repurchase of shares, which we'll be very active in doing," he said.

As previously announced, the company's directors authorized a 5 million-share buyback program, which would increase to 10 million shares if deferred until the split is effective.

Murren said the yield on the quarterly dividends compares favorably with that of traditional industries and should broaden gaming's appeal to investors.

"I can't tell you how many times we've gotten calls from institutions that said, 'we can't participate in gaming companies because we can only invest in companies that pay dividends.'

"And the yield isn't insignificant," Murren said. "It would be 1.7 percent annually based on the closing price of the stock Monday, compared with the average dividend yield of the Standard & Poor's 500 of 1.2 percent.

"That means we're paying a higher yield than the broader market at the same time we're growing earnings more rapidly than the broader market."

Murren said the income, coupled with the potential for price appreciation in the stock -- which has climbed more than 85 percent in value over the past year -- should attract more small investors, as well.

"The retail client, who hasn't been present in our stock, will find a more manageable price per share," he said. "With the dividend and the lower stock price, it will be a more compelling buy.

"The stock market has been very clear that it will reward companies that harvest their free cash flow and allocate it wisely. And I'd bet that as successful as this will be for us, it will encourage our friends in the gaming industry to consider the same actions."

Both Murren and Anders said the dividend payments, which will total about $46 million a year, won't impact the company's growth. Analysts project MGM Grand's cash flow at $425 million for 1999 and about $500 million for 2000.

"Importantly, MGM Grand hasn't curtailed its growth plans to fund its dividends or to repurchase shares," Anders said. "It plans to build a permanent facility to replace the temporary one in Detroit, and may construct a property in Atlantic City."

"We're working overtime to create value for our shareholders and have a lot of tricks up our sleeve yet," Murren said. "I think industry consolidation will continue and we've got to factor into that in some way."