GAMBLING: Dividend plan may lift casinos

Tax break could attract new investors

January 08, 2003 - Gaming stocks stand to get a big boost from the Bush administration's proposal to eliminate federal taxes on dividends, industry analysts and insiders said Tuesday.

"The proposal potentially could lead a lot of gaming companies to move toward implementing dividend policies," said Joe Greff, gaming analyst for Fulcrum Global Partners, an independent Wall Street investment research firm.

Gaming companies generally do not pay dividends on their shares with investors relying instead on market appreciation for returns on their investments.

"(Bush's) proposal could act as an incentive for companies to start paying dividends and that would attract a whole new class of investors, those looking for dividend income," Greff said.

Companies such as Mandalay Resort Group, Harrah's Entertainment, MGM Mirage and Park Place Entertainment Corp. have sufficient cash flow to make dividend payments practical, analysts said.

"Mandalay has spent the most time internally thinking about paying dividends. It could easily implement a dividend policy of, say, 4 percent. That would be good for its stock and should attract a whole new class of investors," Greff said.

Mandalay President Glenn Schaeffer couldn't be reached for comment, but insiders confirmed the company's interest in an aggressive dividend policy.

Las Vegas Investment Advisors Chairman David Ehlers said major gaming companies will take a new look at the cost of capital if the Bush plan passes Congress and is signed into law.

"If they've a mind to sell more equity stock, a dividend policy will impact sellers of securities and help them raise capital," he said. "Investors are aware that gaming companies don't pay dividends and, ultimately, the value of stock lies in its ability to return value to investors.

So if any of these companies decide to establish dividend payouts, as is likely, investors will look at it as a return on capital and will invest accordingly."

Deutsche Bank Securities analyst Marc Falcone agreed that issuing dividends would attract a new class of investors, but warned the industry tends to be capital intensive and most gaming companies still have heavy debt levels.

"While we'd encourage them to do dividends, I'm not sure they'll move on it until they are comfortable with their debt levels and their capital allocation processes," he said. "The most likely candidates we'd like to see are International Game Technology, GTECH Holdings Corp. and maybe Harrah's Entertainment."

Mandalay Resort Group could also issue dividends if it wanted, but that would probably make it stop or slow buying back shares, he said.

Not all analysts were bullish on gaming companies adopting dividend policies.

"If they dividend out cash, it'll be built into stock prices as well," said Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting company. "The market will adjust and stock prices will get pulled down if the open market works."

"On the other hand, a new class of investors would build in a premium which would also be built into stock prices (and tend to adjust them upward)," he said.

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Article Copyright ©: R. Smith, Las Vegas Review-Journal