Dividend Focus Stock: World-Class Mountain Resorts Built to Endure
Shares have struggled, but Vail Resorts' strong assets and attractive dividend remain, and quality should ultimately win out.
Our Dividend Informer analysts give Vail Resorts (MTN) our highest marks for Capital Return. Vail Resorts has suffered two bad ski seasons in a row, and shares are beaten down. Stocks can always go lower, but we think its first-class assets will eventually earn back the premium multiple that shares once enjoyed.
Why to Consider Vail Resorts Now
Premium mountain resort portfolio with several of North America’s most valuable and difficult-to-replicate ski destinations.
Significant earnings recovery potential as weather conditions, skier visitation, and profitability rebound from recent depressed levels.
Attractive dividend yield above 6% provides meaningful income while investors wait for a turnaround in operating results.
The yield is attractive as long as the dividend can be sustained.
Read on for a description of the company’s fundamentals, overview of operations, key projections for total return from the current price, and the all-important suggested buy price for disciplined dividend investors….
Overview
Unusually mild winter weather in the Rocky Mountains created havoc for Vail Resorts this ski season. While weather trends have not been nearly as bad across the rest of the portfolio, the Rocky Mountain properties are the bulk of the business.
Vail owns and operates a 42-resort portfolio that includes five of the ten most visited resorts in North America. It owns the biggest by annual visitation, Whistler Blackcomb (B.C., Canada), and the top three in the U.S., Breckenridge (Colorado), Park City (Utah), and Vail Mountain (Colorado). It also owns three of the five largest ski resorts in Australia and two resorts in Switzerland. A smattering of regional properties rounds out its portfolio. Over 80% of revenue is captured in the second and third fiscal quarters, spanning November through April.
This season, skier visitation in the Rocky Mountains dropped more than 20% due to low snowfall levels. Ski pass sales declined by double digits. Revenue did a little better due to modest price hikes. The fiscal year, which ends in July, is expected to produce EPS of about $4.41, a little less than half what the company earned in peak years. Vail believes it outperformed competitors by a wide margin, but this claim is difficult to test because competitors in the region do not release public financials.
Unsurprisingly, shares are suffering, down nearly two-thirds from their all-time highs set in late 2021. The company raised prices very aggressively coming out of the pandemic, capitalizing on consumers’ desire for outdoor activities and “revenge travel.” In retrospect, those aggressive price hikes brought pushback from skiers and also set up difficult financial comparisons which have made the ensuing lean years look considerably worse.
Debt levels are a hurdle and borderline concerning. Based on depressed profitability, the current leverage ratios show total debt at 3.8 times EBITDA and net debt at 3.5 times. Financial results should improve going forward. However, another season of terrible weather would presumably only exacerbate the situation.
One of the things that attracted us to Vail in the first place was its aggressive capital return policy. This has become a double-edged sword with respect to the current debt levels. An investment is a bit of a gamble, as one would expect when a stock is priced to yield over 6%. We normally steer clear of such situations.
However, Vail owns unique assets with tremendous long-term value. We will ski off the marked trail here and see whether our little jaunt results in broken bones or happy memories.
Scores
Capital Return: A
Vail’s capital return policies have probably been a little too generous.
The annual dividend of $8.88 is covered by cash flow but not by earnings. Returning extra cash flows to shareholders in the form of buybacks has not paid off for the stock recently, but it sets a good precedent.
As long as Vail maintains its dividend throughout the downcycle that started in Fiscal 2024 and comes out the other side with the flexibility to increase it in the future, the company’s “A” grade looks safe.
A dividend reduction could become necessary, but we are basing our grade on the current circumstances.
Growth: C
With its portfolio of high-quality assets, Vail should at least be able to raise prices along with inflation over time.
EPS can outgrow revenue simply by converging with higher free cash flow over time.
That combination would normally be good enough for a “B” grade, but we are docking points for the way debt levels tie management’s hands with respect to business investment.
Stability: C
Shares of resort companies tend to rise and fall with the consumer economy.
Vail’s portfolio of premium assets should not be very economically sensitive, but weather vicissitudes have become a problem.
Debt and heavy dependence on snowfall in certain areas restrict this to a “C” grade.
Governance: B
We were too rosy about the former CEO, Kirsten Lynch, whose tenure turned out to be brief.
Bob Katz returned to replace her. This is his third stint as the company’s CEO.
Executive and board compensation appear to be typical.
Most of the independent directors have clearly relevant backgrounds.
We award the company a “B” grade.
Vail Resorts is traded on the NYSE under the symbol MTN.
Website: investors.vailresorts.com/
