Gaming and gaming solutions business Tabcorp Holdings Limited (ASX: TAH) last week announced earnings for the 2014 financial year that were bang on consensus forecast for earnings and profit. Interestingly however, the group greatly surprised with better free cashflow than expected and a bright outlook for the group's dividend payout.
Big Yield
Last financial year Tabcorp paid out a dividend of 16 cents per share, representing a payout ratio of 81.3% and a yield of around 4.4% based on the current share price. Tabcorp reported that based on the surplus amount of free cashflow being generated by the business, the payout ratio would increase to 90% of net profit next financial year.
Based on a 6% growth in earnings per share (seeing as Tabcorp is a heavily regulated company), this should see the dividend increase to around 19 cents per share. This represents a yield of 5.2%, or 7.4% when grossed up for franking credits.
Outlook
The consensus estimates of analysts covering Tabcorp is for mid-single digits earnings growth for the foreseeable future. Purchasing at today's share price could result in a yield approaching 6% within two years.
Business & Competitors
Unfortunately for Tabcorp, it operates in heavily regulated sectors and industries that encourage competition from overseas companies. The company's four segments are spread betting on sports and racing, its media and international division that provides international racing feeds, Keno in New South Wales, Queensland and Victoria, and Tabcorp Gaming Solutions.
The final two are the best protected from international competition, however astute investors will note that there are now a number of listed players in the gaming solutions space. The Keno licences are long term and defendable, while the general betting and essentially international media streaming divisions are facing stiff competition from overseas betting groups.
These are the prime reasons for the low growth expected by analysts, however acquisitions and a greater proportion of earnings coming from the gaming services division will help the company grow over the long term.
