Las Vegas Sun

March 29, 2024

Mandalay Resort to issue first-ever cash dividend

Mandalay Resort Group said Thursday it would issue its first-ever quarterly cash dividend to shareholders beginning in August, a move that boosted casino stocks this morning and led analysts to predict similar moves by competitors in response to recent tax reform and healthy balance sheets.

The dividend policy comes just a week after slot maker International Game Technology said it would issue its first cash dividend in years.

The news sent casino shares higher amid a broader market decline. Four Wall Street analysts upgraded Mandalay Resort Group as its shares moved up by more than 10 percent, to $34. MGM MIRAGE shares jumped by more than 4 percent, to $34.48; Harrah's Entertainment Inc. rose 2.2 percent, to $42.83; and Park Place Entertainment Inc. rose 3.2 percent, to $8.52.

Mandalay's first quarterly payment, of 23 cents per share, will be distributed Aug. 1 to shareholders of record on June 26.

The dividend policy was driven by a combination of federal tax reform and "strong expectations for rising free cash flows in the coming years," Mandalay Resort Group Chief Financial Officer Glenn Schaefer said.

President George W. Bush last month signed a $350 billion stimulus package that includes tax cuts on dividend payments and capital gains.

Over the past decade, casino companies have primarily spent so-called free cash flow -- the money left over after paying interest and taxes and funding maintenance projects -- on expensive new projects such as resorts, acquisitions and upgrades.

With fewer expansion opportunities on the horizon, casino companies are looking at other ways of using that money to enhance shareholder value, analysts say.

Dividends are capable of attracting a new class of investor, including more conservative individual investors as well as mutual funds that have a dividend requirement, they say.

Major gaming companies such as Mandalay have a history of returning cash to investors by buying back stock, which drives up earnings per share. But dividends offer the most visible evidence that cash-rich casino companies, notorious for spending their earnings on lavish projects, still have money left in the bank, said industry analyst J.Cogan of Banc of America Securities.

"The biggest issue for gaming stocks is whether there is any cash flow at the end of the day," Cogan said. "Investors just don't believe the free cash flow stories that the companies have promoted over time. On the margin, it gets spent on projects that may not have the best potential for return."

Mandalay's stock, for example, has traded at a discount relative to its free cash flow yield, Cogan said. It's a sign that investors have been uncertain about whether companies can meet the projections they have set, he said.

Dividends may also increase stock prices as investors feel they are getting something for their money and new investors enter the pool, analysts say.

"This dividend is probably a good shot in the arm for the industry and particularly for Mandalay in attracting a more value-oriented investor," McDonald Investments analyst Dennis Forst said. "It proves the case for how positive the free cash flow numbers are in the industry."

Shares of IGT rose more than $2 after the company said last week it would begin issuing a 7.5 cent dividend beginning July 28. Shares rose $1.02 to $96.75 in early trading today.

Dividends also tie up a significant amount of cash into the future, requiring companies to be more disciplined in their spending habits, analysts say.

Harrah's Entertainment Inc. and MGM MIRAGE say they are both considering the move now that favorable tax laws are imminent. Mandalay's actions wouldn't be a factor, they said.

"We've historically used our fairly significant cash flow to take advantage of development opportunities, to pay down debt, to repurchase shares at times and also on maintaining our properties," MGM MIRAGE spokesman Alan Feldman said.

MGM Grand Inc. approved a quarterly dividend plan in December 1999 and issued its first dividend of 10 cents per share the following March. The policy ended after the company announced its acquisition of Mirage Resorts Inc. in April 2000.

Most companies are considering the move given the new tax rules and an estimated $1.3 billion in free cash flow that the top 10 gaming companies are expected to generate next year, said Joe Greff, an analyst at Fulcrum Global Partners.

Mandalay expects to free up more cash when it finishes two projects near its flagship resort this year. They include a $230 million, 1,122-suite hotel tower that would feed its Mandalay Bay casino and convention center and a 90,000-square-foot retail center, costing up to $40 million, linking its Mandalay Bay and Luxor casinos.

The company spent about $301 million in fiscal 2003 on its convention center and other projects. It has been one of the most aggressive purchasers of its own shares, buying back more than 27 million shares over the past three years ended Jan. 30.

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