WYNN - Wynn Resorts: Too Much Of A Gamble

2023-11-02 16:49:27 ET

Summary

• Wynn Resorts shares have fallen 6.3% in the past two months, making them less attractive than the 10-Year Treasury Note.
• The dividend of Wynn Resorts would need to grow at a CAGR of 42.9% over the next decade to equal the cash flows of Treasury Note holders.
• The stock is not reasonably priced and does not offer a sufficient risk-adjusted return relative to the Treasury Note.

It’s been just under two months since I offered up my view that the shares of Wynn Resorts, Limited ( WYNN ) are less attractive an investment than the 20-Year Treasury Bond, and in that time the shares have fallen about 6.3% against a loss of about 3.4% for the S&P 500. In fairness, though, I should point out that the yield on the 10-Year Treasury Note has climbed about 9% and the 20-Year Bond has climbed about 10% since I submitted this article, so it’s been a painful time for everyone. The company is about to release earnings again, so I thought I’d review the name to see if it makes sense to buy or not ahead of earnings. After all, a stock trading at $89 is, by definition, a less risky investment than the same stock when it’s trading at $95.50. In keeping with my earlier comparison, I’ll make this determination by comparing the cash flows from the 10-Year Treasury Note at the moment relative to the cash flows on offer from the dividend of this stock. That will give us some sense for how much capital gains will need to “lift the load” to allow stockholders and Treasury holders to come out even after a decade. I’ll also compare the current valuation of the stock to its recent past. I’m doing this because I think the dividend is very well covered, and the payout ratio is low, so if the shares are inexpensive enough, they may be compelling.

I know that my writing can be “a bit extra” as the young people like to say. Given that, and given that I’m absolutely obsessed with trying to make your reading experience as enjoyable as possible, I offer a “thesis statement” at the beginning of each of my articles. This gives you the “gist” of my thinking in a single paragraph, which allows you to then go about and do more productive things with your day. You’re welcome. In spite of the drop in price, I think these shares represent relatively terrible value at the moment. In a world where an investor can receive 4.7% risk free, why would they buy this? Put another way, the cash flows that the Treasury holder is guaranteed to receive are much greater than the much more opaque returns from this stock. Given that we’re here to seek “risk adjusted returns” and not simply “returns”, I think Wynn Resorts is, if you’ll forgive this, too much of a gamble. Thus ends my thesis statement. If you read on from here, that’s on you. I don’t want to read any bellyaching below about the tiresome jokes that I’m constantly rolling out or my proper spelling.

To refresh your collective memories, I earlier characterised the financial results here as either “great” or “middling”, depending upon the point of comparison. Relative to 2022, 2023 looks very good indeed. Relative to 2019, it looks quite soft. This is one of those companies that has not yet returned to its pre-pandemic levels of profitability. That written, with a payout ratio of only 24%, the dividend is very well covered in my view, and thus I’d be willing to put capital to work here assuming two things. Namely, that I cannot get a higher return with lower risk elsewhere, and/or if the valuation is reasonable relative to this stock’s past ratios.

To the first assumption listed above, I want to engage my desire to compare this stock to the current risk free rate, and in so doing, work out a few things. First, at what rate will the dividend need to grow for owners of the stock and owners of a 10-Year Treasury Note to receive identical cash flows over the next decade. Second, coming from this analysis, how much do we need to generate in capital gains for the stock and the 10-Year Treasury to offer investors identical cash flows.

If you’re wondering at what rate will the dividend need to grow from current rates in order for investors in this stock to receive identical cash flows to those of investors in the 10-Year Treasury Note, then wonder no further, for I’ve produced the answer to that question for you, and I offer now in the table below that I hope is both “handy” and “dandy.” Please note that in the table below, I compare the use of capital required to buy 100 shares of stock at the current price, relative to putting the same capital to work in a Treasury Note. The answer to the above question, in case you don’t feel inclined to read the relatively small text of my table, is that the dividend would need to grow at a CAGR of about 42.9% over the next decade to equal the cash flows available to Treasury Note holders.

That rate of growth is ludicrous, in my view, especially in light of the fact that the dividend has actually shrunk over the past decade. In 2013, the company paid out $4 in standard (i.e. non “special” dividends), and will pay out one quarter of that figure this year. It may grow from here, but it may not. Now, the Treasury holder will receive about $4,225 in income, and is guaranteed to get their initial capital back. I don’t want to complicate the issue too much with discounting, so I’m just going to write that the Treasury holder will earn a grand total of about 46.6% on their original capital. To match these cash flows, the stock would need to grow at a CAGR of just under 4% over the next decade. That’s troublesome, in my view, given that this stock’s performance over the past decade might be described as “sclerotic at best.” A decade ago, the shares were changing hands at about $160 per share. Today, they’re trading for $89.40.

Finally, I think the point I’m about to make is a very obvious one. Those who know me best would characterise me as fairly didactic, though, and so I’m comfortable living in the land of the obvious point. Here it is: I think investors should demand from their stock investments something actually greater than those cash flows offered up by 10-Year Treasury Notes, given the predictability of cash flows from the former is far, far less predictable than it is for the latter. For that reason, I think we should take the analysis above with a side dish of very many grains of salt. For my part, I demand a risk premium of about 3% per annum from my stock investments given the various risks involved, and thus I think it reasonable to suggest the inadequacies of this stock are even more severe than stated above.

Given the world in which we live where investors can receive a guaranteed return of over 4.5%, I think it reasonable to demand a very healthy discount on the valuation. I’ll tend to that question next.

The Stock

There’s a very real possibility that the dividend may actually grow from current levels, given the very low payout ratio. There’s also a very real possibility that the price chart for this stock might go from looking like the wave patterns of a calm lake to looking like a hockey stick. Many things are possible, and so it might be worth buying the stock at the right price.

Those masochists who read me regularly know that when I write “right price”, I’m really talking about “cheap.” “Right price” makes me sound like less of a vulgarian, I suppose, so that’s the phraseology I employ, but the point is the same. I don’t want to overpay for a stock, and I want to see it trading at a discount to both the overall market and its own history. I like cheap, sorry “reasonably priced”, stocks because they offer a great combination of lower risk and higher return potentials. They offer lower risk because a great deal of bad news is already “priced in.” Thus, if a bad report comes along, there’s little reason for them to drop much further. I think they offer great return potential because any bit of surprisingly good news may take the shares skyward, in a hockey stick-like trajectory.

Those who read me regularly know that I measure “cheap” in a few ways, ranging from the simple to the complex. On the simple side, I like to look at the ratio of price to various economic variables. Again, I want to see the stock trading at a discount to both the overall market (not hard at the moment) and to its own history. We see from the chart below that the market is paying about the same for $1 of sales as it has for much of the past decade, and the market is paying about 50 times free cash flow.

Based on the above, I don’t consider these shares to be “reasonably priced.”

In my view, investors seek risk adjusted returns and not simply “returns.” Given that the 10-Year Treasury Note is just as available to investors as is this stock, there’s no reason to buy the latter when you can buy the former. Put another way, I think quality sleep is another source of “returns” that we should start to track, and I think owning the Treasury Note will offer relatively much more of that precious commodity than will this literal as well as metaphorical gamble.

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