The growing theme for U.S.-listed gaming companies this year has been returning capital to shareholders.
Companies as large as MGM Resorts and as small as Inspired Entertainment have share repurchase plans in place. Everi just authorized a $150 million repurchase program. Red Rock Resorts has reinstated a dividend. Light & Wonder recently repurchased a whopping 2.4 million shares. Penn National has bought back $175 million in shares. Some companies have repurchase plans to be opportunistic, such as Golden Entertainment. Some, such as IGT and Boyd, are both repurchasing shares and paying cash dividends.
And while the purpose of rewarding shareholders sometimes is defeated by generous stock options to management that keep share counts high or even growing, some companies are truly reducing the number of shares outstanding. MGM, for example, brought its share countdown to 442.9 million at the end of the first quarter from 494.9 million last year. Ditto Churchill Downs at 38.8 million vs. 39.6 million.
This movement towards returning capital to shareholders is a natural result of growing free cash flow. Companies have dramatically reduced costs while business recovers from Covid lockdowns and as they adopt prudent growth strategies.
It’s almost a complete about-face from two years ago, when companies scrambled to shore up their balance sheets and build liquidity as casinos shut down in the early months of Covid.
Today, company after company will say it’s in the happy position of being able to achieve its first priority—to reinvest in growth—while strengthening its balance sheet and still having growing cash available to give back to shareholders.
And indeed, that does appear to be the case.
The move towards share repurchases also is getting a big push from the bearish stock market, which has driven down prices of companies like Inspired and Everi to levels of perhaps half where they should be based on estimated 2023 earnings, perhaps to just a fraction of future prices given the underlying growth and strength of their businesses.
As Inspired Executive Chairman Lorne Weil said in his company’s first-quarter conference call, he’s never been enthusiastic about share repurchases, but he’s now in the position of having ample money to invest in growth as well as strong business prospects and a stock price that doesn’t reflect either one.
So which is better for investors, repurchases or dividends?
The argument for repurchases is that it increases the value of shareholders’ investments without the income tax consequences of dividends, and provides companies a greater flexibility in deploying excess capital.
From an investor’s viewpoint, I daresay that dividends are superior. They provide cash that investors themselves can decide how to deploy. And they’re tangible, unlike share repurchases which, as mentioned earlier, can lose their stated purpose at companies with overly generous stock options programs.
Either way, it’s heartening in a world worried about war, inflation and possible recession that so many gaming companies have the free cash flow to pay dividends, buy back shares or both.
