Casinos can be a boom-or-bust industry. The past two years were easily in the ‘bust’ category.

Las Vegas Sands (LVS) has seen its revenue and profits plunge since 2014, due primarily to the anti-corruption regulatory crackdown in China.

This has suppressed gaming activity in Macao, a major market for casino operators.

Las Vegas Sands had aggressively raised its dividend over the past five years, and now has a current dividend yield of 5%. It is one of 295 stocks with a 5%+ dividend yield.

Its dividend yield towers above the average dividend stock in the S&P 500 Index, by several percentage points, making it an appealing stock pick for income investors.

However, there are some red flags that the dividend may not be sustainable. The company’s fundamentals have deteriorated in recent years, and it is no longer generating enough profit to cover its dividend payout.

This article will discuss whether income investors should place their bets on this high-yield dividend stock.

Business Overview

Las Vegas Sands is an integrated gaming and leisure company. It has a variety of properties, including casinos and hotels.

The company operates five segments:

• Casino (72% of revenue)
• Rooms (12% of revenue)
• Food & Beverage (7% of revenue)
• Mall (5% of revenue)
• Convention, Retail & Other (4% of revenue)

The downturn in Macao gambling has hit Las Vegas Sands hard. The vast majority of its revenue is derived from casino operations.

In addition, through its 70% ownership of Sands China Ltd., Las Vegas Sands owns and operates a number of properties in Macao, including The Venetian Macao, Sands Cotai Central, The Parisian Macao, Sands Macao, and more.

In all, Las Vegas Sands generates more than half of its total EBITDA from its Macao operations.

Source: Q1 Earnings Presentation, page 6

Macao is a very important market for casinos, because it is the largest gaming market in the world. It is also the only market in China where casino gaming is legal.

According to government statistics, Macao gaming revenues were $28.1 billion in 2016, a 3.4% decrease from the previous year. This is due to the aforementioned government crackdown.

The industry downturn has clearly affected Las Vegas Sands, as it has invested approximately $13 billion in Macao since 2002.

Because of the Macao downturn, Las Vegas Sands’ revenue peaked in 2014 at $14.58 billion, but declined over the next two years.

In 2016, revenue fell to $11.41 billion. From 2014-2016, the company’s earnings-per-share fell 40%.

Growth Prospects

The past two years have been painful for Las Vegas Sands.

The good news is, Macao finally saw a recovery in the first quarter. Adjusted property EBITDA rose 20.5% year over year.

Source: Q1 Earnings Presentation, page 10

This resulted in an increase of Las Vegas Sands’ total revenue of 14%, $3.11 billion. Diluted earnings-per-share increased 50% from the same quarter last year, to $0.60 per share. One of the contributors was a return to double-digit growth in the lucrative, high-margin mass-market segment.

There is hope for a sustained recovery. Not only has overall Macao gaming activity returned to growth in 2017, but Las Vegas Sands’ most recent addition to its Cotai Strip portfolio—The Parisian Macao—is ramping up.

The Parisian Macao was a $2.9 billion development, with more than 2,700 hotel rooms and over 200 plaza suites. The Parisian Macao had its grand opening on September 13, 2016. In the first quarter of 2017, it generated $82 million of EBITDA.

Source: Q1 Earnings Presentation, page 17

Thanks to the recovery in Macao gaming activity in early 2017, and the opening of the Parisian Macao, things were looking up in 2017 for Macao—and by extension Las Vegas Sands. That is, until the Macao government announced a new ATM rule on May 8.

Under the new rule, anyone holding UnionPay ATM cards will have to present identification cards and undergo a facial recognition scan, before they can withdraw money from the ATMs.

The jury is still out as to how this will affect gaming activity in Macao. It could be just a short-term impediment. Nevertheless, it could suppress use of ATMs by gamblers, which Las Vegas Sands does not need during an already-fragile time for Macao.

Dividend Analysis

Las Vegas Sands aggressively raised its dividend over the past several years. Dividend growth averaged 24% per year, since 2012.

The company also allocated significant resources to buying back stock. All told, Las Vegas Sands returned $16.4 billion to shareholders in combined cash returns since 2012.

Source: Q1 Earnings Presentation, page 7

The question is, did Las Vegas Sands raise its dividend too much?

There are two major concerns regarding the sustainability of Las Vegas Sands’ dividend. First, the company is not currently earning enough profit to cover the dividend payout.

2016 was the second year in a row in which earnings-per-share fell below declared dividends. Las Vegas Sands declared dividends of $2.88 per share, but earnings-per-share were just $2.10 per share.

This represented a payout ratio of 137%. A payout ratio exceeding 100% is unsustainable over the long-term.

And, even though Las Vegas Sands’ revenue and earnings recovered significantly in the first quarter, earnings-per-share still did not cover the quarterly dividend rate. Consequently, further recovery is needed before the company’s dividend is sustainable.

The second red flag concerning the dividend is that Las Vegas Sands has a high level of debt. At the end of last quarter, Las Vegas Sands held $9.91 billion of debt, with a cash balance of $1.97 billion.

Over the past two years, Las Vegas Sands’ free cash flow has not covered its dividend. The company has filled the shortfall by issuing debt and using existing cash on hand, but this cannot continue indefinitely.

As a result, if 2017 is another year of falling earnings-per-share, Las Vegas Sands may have a difficult decision to make in 2018 regarding its dividend.

Final Thoughts

Las Vegas Sands’ fortunes rely heavily on Macao. Some progress in Macao has been made in 2017, but just when it appeared to be gaining traction, the new ATM rule dealt another blow to Las Vegas Sands.

If the ATM rule is only a short-term problem, and gaming activity continues to recover, the dividend could survive intact.

However, there is no guarantee of this. As a result, only those investors unafraid to take added risks, should consider wagering on Las Vegas Sands’ 5% dividend yield.