Why MGM Resorts hasn’t paid dividends for over a decade

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No dividend strategy

A dividend is a portion of a company’s profits. The absence of dividends is common for companies like Caesars Entertainment (CZR) and Boyd Gaming (or BYD). The companies have a large amount of interest-bearing debt to retire in the long run. A lack of dividends is even common for big IT giants like Google (GOOG) or Amazon (AMZN). These companies invest heavily in growth opportunities to acquire and retain more customers.

FCF vs EPS

The above chart shows that MGM Resorts’ (MGM) free cash flow immediately after 2005 has been impacted negatively. MGM raised a significant amount of debt to finance the acquisition of Mandalay Bay. Mandalay Bay is a casino resort on the Las Vegas Strip.

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A company that plans to grow much larger might reinvest its profits back into the company, so that it’s worth more in the near future. This strategy is intended to make the company more valuable. It expands the customer base and provides opportunities to enter new markets. It increases demand. It also raises the price of the stock.

Investors can gain exposure to the leisure industry by investing in an exchange-traded fund (or ETF) like the Consumer Discretionary Select Sector SPDR Fund (XLY).

A company may not pay a dividend if its directors believe that it’s better to put the company’s profits back into the business. This would make the business more valuable. Warren Buffett’s Berkshire Hathaway is an example of this. The company has grown by acquiring other businesses—mainly in the U.S. and Canada.

Management’s views

MGM’s senior credit facility restricts its ability to pay cash dividends with respect to its common stock. Also, MGM’s ability to pay dividends will depend on the receipt of dividends and other payments from its subsidiaries. MGM intends to retain any earnings to fund the businesses’ operations, to service and repay its debt, and to make strategic investments.

MGM China paid dividends

MGM China paid a $499 million in a special dividend in March 2014. It paid a $127 million final dividend in June 2014. $245 million and $62 million were distributed to non-controlling interests, respectively.

In the next part of the series, we’ll discuss why MGM’s liquidity could be a concern for investors.

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