When I was a kid some of my favorite video games involved building and managing amusement parks. I played Theme Park on the Sega Genesis and later Roller Coaster Tycoon on the PC, both classics. Of course, these games make the business seem easier than it really is. It’s a volatile industry which isn’t exactly recession-proof, and many amusement park operators had a rough time during the recent financial crisis and the recession which followed.
But now, as the economy is slowly but surely getting stronger, amusement park operators are doing a lot better. Crowds are bigger, people are spending more, and profits are flowing. And as it turns out, these companies are returning much of these profits to shareholders in the form of dividends. Pure play Six Flags Entertainment Corp (NYSE:SIX) pays a 4.63% dividend, while competitor Cedar Fair, L.P. (NYSE:FUN) pays an astonishing 5.88% dividend. The Walt Disney Company (NYSE:DIS), which derives much of its profits from its media holdings and not its parks, pays a far lower 1.15% dividend.
Quite a comeback
The reason for the stock performance is simple – the company started making money. At the end of 2008 Six Flags Entertainment Corp (NYSE:SIX) had nearly $2.4 billion in debt, resulting in annual interest payments of $179 million. Interest ate up about 17.5% of the total revenue and completely wiped out any operating profits. After the bankruptcy the debt levels dropped, now just $1.4 billion, and annual interest payments have plummeted to around $65 million.
This cleaner balance sheet led to a profit in 2011 and a much bigger profit in 2012. The company has about $1 billion of net operating loss carry-forward, meaning that taxes for the next five years will be minimal. In 2012, after adjusting for a large tax benefit, the company recorded about $3.85 in EPS. The company, using a modified calculation, puts its cash EPS at $4.50, and they project this number to grow to $6 per share by 2015.
Along with the reduction of interest payments these earnings were driven by a reduction in operating expenses. From 2009 to 2012 cash operating costs as a percentage of revenue dropped from 75.6% to 61.2%. This has allowed the company to use its new-found cash flow to buy back its own shares. In 2012 the company bought back $232 million worth of its shares, and in the first quarter of 2013 bought back an additional $375 million of shares.
After initiating a small dividend in 2011 the company has drastically raised that dividend twice, first to $0.60 per quarter per share in 2012 and now to $0.90 per quarter per share. This puts the yield at 4.63%. The payout ratio, based on the company’s cash EPS number, is high at 80%. But if cash EPS grows to $6 by 2015 as the company projected an 80% payout ratio would yield a annual dividend of $4.80 per share, 33% higher than today.
