Tag Archives: yield

LVS Macau update–Wynn Resorts, too

November 11, 2009 By in Hong Kong, Recent Market Action Tags: , , , , , , Leave a comment

Sands China

On Monday Bloomberg reported the unofficial details of the upcoming IPO in Hong Kong of  Sands China, LVS’s Macau subsidiary.  According to the news organization, LVS hopes to sell 1.87 billion shares, or 23.4% of Sands China, at between HK$10.38 and HK$13.88.  At the high end of the range, this would mean US$3.4 billion in proceeds for LVS.

Remember, too, that LVS has already raised $600 million through a September offering of bonds convertible into Sands China stock at a discount to the IPO price.  These shares represent about another 4.5% of Sands China.

IPO headwinds?

This will be an interesting IPO to watch, particularly its pricing.  LVS’s strategy, which appears to me to have been the soundest alternative, was to follow quickly on the heels of the IPO of the Macau subsidiary of the better-known Wynn Resorts.  The hope would have been that Wynn Macau would have had a spectacularly successful launch, setting a very high valuation standard and whetting investors’ appetite for another new casino stock.

Since its debut, however, Wynn Macau has struggled to remain above the IPO price of HK$10.08 and has (briefly) traded below HK$8.70.  This is doubtless in part due to the flood of IPOs now engulfing the Hong Kong market.  But Wynn Macau’s price action also contrasts sharply with that of Sinopharm, launched at about the same time, which is now 65% above its IPO price.

Also, according to Bloomberg, the high end of the range for Sands China would price the business at 16.5x next year’s operating earnings.  This would be about a 15% premium to the valuation Wynn Macau is being awarded in the market.

In addition, the Sands IPO will presumably launch at about the same time as Minsheng Banking.  Minsheng, a mainland Chinese bank, is planning the largest Hong Kong IPO in two years, aimed at taking in about 3x what Sands China hopes to raise.

Certainly the IPO will get done.  Will Sands China be able to convince investors that it deserves the highest rating of all the casino stocks in Hong Kong?  It will be a very strong endorsement for LVS if it can.

Wynn Resorts’ $4 special dividend

For its part, WYNN announced yesterday its intention to pay a special dividend to stockholders of $4 a share, the third such payout in its short history.  WYNN will also initiate a regular dividend of $.20/share in the first quarter of 2010.

It’s worth noting that WYNN, which felt compelled to raise new equity twice during the financial crisis to bolster its financial position (the company parted ways with its CFO after the second one), now is comfortable enough to return $500 million to shareholders.  More important, the company’s lenders feel comfortable enough to permit this to happen.

Finally, the Chinese authorities, who sparked the current banner period for Macau casino operators by relaxing visa requirements for visitors from southern China, have just tightened them a bit again.

11/23/09   An update on Sands China:  here’s the link.

What’s the “right” price for 10-year Treasury bonds?

May 29, 2009 By in Strategy Tags: , , , , , , , , , Leave a comment

There’s a practical rule of thumb that has worked over many markets and many periods of time about expected returns for stocks, government bonds and cash.  It is:

stocks return inflation + 6% annually;

(long-dated) government bonds return inflation + 3% annually; and

cash returns inflation + (maybe) 1% annually.

In the absence of any specific insight about the current period (for example, I think stock returns will be higher than this rule implies over the next year or two), this is a reasonable starting point for a projection.

If the long bond is the 30-year, and if inflation will on average be 2% over the life of the bond, then the yield should be about 5%.

For the ten-year, the yield should be around 4%.

For cash, a “normal” yield should be around 2%. We know, though, that the Fed has made short rates as strongly negative in real terms as it can, because of the financial crisis.

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What Ever Happened To Yield Support?

February 26, 2009 By in Stock ideas Tags: , , , , , 1 Comment

What is yield support?

It’s a notion that was prevalent in the Eighties and earlier, back when the S&P had a long history of significant nominal dividend yield.  The idea is that, in a downturn, the fall in the market as a whole–and in dividend-paying stocks in particular–will be cushioned by the fact of continuing dividend income.  At some point, the argument goes, a 4%-5% dividend yield means “you’re being paid to wait” for earnings to recover.  This current income means you can buy the stock sooner, and at a higher price, than you would without the dividend.  Therefore, the price never gets to the level of the most bearish prediction.

In the old days dividends were important enough as a component of total return that a famous Wall Street strategist sounded a stern warning in the mid-Eighties that the stock market was about to collapse.  His reason?–the dividend yield on the market had broken below 3%.  He had charts showing that this had occurred only a few times in the post-WWII era, and then only for short periods.  Every time, the market had soon entered a severe correction.

Unfortunately for this prediction, and for this guy’s career as a strategist, the stock market powered ahead from that point for fifteen more years.  The dividend yield on the S&P steadily declined to around 1%, returning to the 3% level only during the 2008 market decline .

What went wrong?  What didn’t he see?  I think the most important factors were:

* investor preferences changed.  Baby Boomers wanted capital gains, not dividend income.

* this allowed younger, more capital-hungry companies (who wouldn’t pay any dividends) to list, changing the composition of the market.

* disinflation raised the real value of even a static nominal dividend (the story of consumer staples and utilities in the Eighties).

“Paid to wait” is the operative phrase now

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