Why it could get even worse for casino stocks

Casino stocks have run into quite the spate of bad luck.

Heavily exposed to the Asian gaming wonderland of Macau, Las Vegas Sands and Wynn Resorts have lost 30 and 40 percent of their value in a year, respectively. The declines come as Macau gaming revenues drop dramatically due to a corruption crackdown from the Chinese government.

Macau Chief Executive Fernando Chui Sai On gave little reason for encouragement on Monday, when he urged the Chinese special administrative region to reach beyond gaming to create a more diversified and less China-reliant economy. Macquarie analyst Chad Beynon called the speech "very negative" for the gaming companies.

One bedrock of support for the stocks remains the relatively rich dividend payouts. Wynn and Las Vegas Sands are paying out dividend yields of nearly 5 percent, potentially making them attractive to yield-chasing investors.

The question is whether the fat payouts can continue.

"Historically, casino companies do not pay dividends because they have these big, chunky projects. And while it's been nice to bring in a dividend, because we don't have the historical context, it's hard to figure out what the right dividend yield should be," Beynon said. "If the fundamentals continue to worsen, then the dividend will not be supported at this level."

Still, the analyst said that with cash flow from operations still running higher than the dividend payout, the big casino company dividends still appear "sustainable here."

Similarly, when asked about dividend security, Nomura analyst Harry Curtis said he's "negative on these names, but not for that reason."

Curtis sees gaming revenue logging a 25 percent year-over-year drop, but he believes that "even in a down-25-percent-market, Wynn and Las Vegas Sands have the sources of operating cash flow to finish building and to pay their dividends, and then once the buildings are up and running there will be less demand on their cash, and dividends will be fine."

From a trading perspective, if Macau does turn around, casino stocks could be in for a pop given the high short interest, said Andrew Keene of Keene on the Market.

But as Beynon notes wryly, the same thing may be said about that famously falling commodity, crude oil.

"It's a similar trade. If you have the courage to put money in WTI, maybe it will go up to $70 and you'll look like a hero, but there's a lot of risk in doing that still."

The key word for casino investors, then: "courage."