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Analysts: More Dividend Plans in Future

6 June 2003

by Rod Smith

NEW YORK -- Casino operators and Wall Street analysts on Thursday predicted dividend payments likely will be the wave of the future for the gaming industry.

The predictions were spurred by International Game Technology's decision Wednesday to institute an annual dividend policy of 30 cents per share.

"We believe this may represent the first of a series of similar moves by other well-capitalized industry players," Deutsche Bank analyst Marc Falcone said.

Gaming operators will be prodded toward dividend payouts by the "virtual expropriation" of earnings in states such as Illinois and the limited prospects for high return growth, a key sign of a maturing industry, he said.

The Illinois Legislature recently approved an increase in the top incremental gaming tax rate to 70 percent from 50 percent, following an increase from 35 percent in 2002.

"We believe this (combination of factors) may lead casino operators and suppliers to re-evaluate their dividend policy and distribution of excess free cash flow to shareholders, especially in light of the recent changes in the federal tax code lowering the tax on dividends to 15 percent," Falcone said.

Fulcrum Global Partners, an independent Wall Street investment research firm, estimated that the 10 major gaming operators nationwide alone will generate $1.3 billion in net free cash flow in 2004.

Based on that cash flow and and the recently passed reduction in tax rates on dividends, Fulcrum analyst Joe Greff predicted that "most gaming companies will seriously consider implementing a dividend."

Fulcrum estimated that Park Place Entertainment could offer a yield of 6.7 percent, MGM Mirage 6 percent and Mandalay Resort Group 5.5 percent, all significantly above the average 1.3 percent yield offered by Standard and Poor's 500 companies.

"It is important to note that Mandalay has been the most vocal proponent of a potential dividend. Given that it does not have any significant capital projects in its pipeline beyond its new hotel tower ... and that it generates significant free cash flow, a dividend could come as early as sometime next fiscal year," Greff said.

Greff said MGM Mirage and Park Place each have significant capital projects slated for 2004 and beyond but could still implement substantial dividends in the near term.

MGM Mirage spokesman Alan Feldman said that with the change in tax policy and "dividends being that much more attractive to investors, it's something we'll probably take a look at."

"As a company, we're fortunate to put off a lot of free cash which in the past we've used for growth, debt reduction and share repurchase, but (dividends are) certainly not something we're ruling out."

Park Place spokesman Robert Stewart said: "Park Place recently has focused on using our free cash flow to upgrade our casino resorts, add new attractions and to pay down debt. We believe that those activities, for the foreseeable future, offer a better opportunity for creating shareholder value than returning equity to shareholders, either by buying back stock or declaring a dividend."

Station Casinos Chief Financial Officer Glenn Christenson said that paying dividends is something his company is actively considering.

"We have significant cash flow so we could offer dividends, but if you commit to dividends, it's a long-term decision. The question is what will tax policy be in the future," he said.

But Boyd Gaming Corp. took exception to analyst predictions.

"We believe it makes more sense to reinvest our profits and achieve good returns which, by the way, still show up in the value of the stock, rather than pay them out in a dividend which could (still) be taxed," Boyd spokesman Rob Stillwell said.

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