Thomas Allen and his colleagues at Morgan Stanley issued an interesting report in their quarterly tracking of institutional investing in gaming and lodging.
For the third straight quarter, investors have moved more money into gaming stocks. Those drawing investments were Boyd Gaming, Gaming & Leisure Properties, MGM Resorts and Wynn Resorts.
What is interesting from our perspective is that these stocks individually and as a group have the look of being defensive plays as investors think about where to park money in a slowing, and perhaps receding, economy.
Consider:
- Stability. There are some uncertainties for Las Vegas Sands, MGM and Wynn, in Macau, both in terms of the economic conditions and government decisions, most especially casino concession renewals. However, Macau promises to be a growing market for years to come. Meanwhile, their Las Vegas Strip properties enjoy the likelihood of long-term growth.
Boyd operates in regional markets that aren’t going anywhere. In fact, in a recession, people putting off a multi-thousand-dollar vacation will still seek entertainment, and the local casino can be an affordable Friday night out. So, as a consumer discretionary business, casinos will see a slow-down, but it might not be as severe as the Great Recession when wealth simply disappeared for millions of Americans.
Boyd also benefits from the growing Las Vegas population in its locals business, which raises the possibility of growing volumes even in a slow economy.
Finally, Gaming & Leisure Properties is a landlord. It will continue collecting rents even in a slowdown.
- Low debt ratio. Allen pointed to Las Vegas Sands’ 1.5-to-1 leverage ratio and suggested some of the movement into the stock might be a flight to quality, especially considering its dividend and its growth projects in Singapore and Macau where LVS targets 20 percent returns on investment.
- Dividends. All the stocks attracting institutional investors pay dividends. Wynn at a 3.5 percent yield, Las Vegas Sands at 5.6 percent and Gaming & Leisure Properties at 7.2 percent are especially appealing.
If a recession hits, there will be damage to stock prices, again, especially considering casino companies are consumer discretionary. But if you are a long-term believer in these companies, they will pay you to wait on recovery. Indeed, a case can be made that owning Las Vegas Sands and Gaming & Leisure Properties, both committed to dividends and both providing yields well above other safe investments, can be justified on dividends and their reinvestment alone to generate decent returns.
Of course, these stocks are not the whole story. The Morgan Stanley survey shows institutional investors reduced their stakes slightly in Boyd’s peer Penn National and Gaming & Leisure Properties’ peer MGM Growth Properties. And the report, as Allen noted, is dated as the data is for the period that ended June 30. Plus, investments do fluctuate and there are lots of reasons for institutions to buy and sell stocks in the near-term or to react to likely nonrecurring events.
But in a world of growing caution on the economy, some gaming companies might provide a safe port during the storm.
