Tabcorp Holdings Ltd (ASX: TAH, OTC: TABCF, ADR: TACBY) is an Australian wagering, gaming and Keno operator with a media unit attached to it. It’s one of the biggest publicly trading companies in the world. Based in Melbourne, Tabcorp was formed in 1994 from the privatization of the Victorian Totalizator Agency Board (TAB).

The stock has been in a long downtrend, falling from an May 4, 2007, all-time closing high of AUD8.08 on the Australian Securities Exchange (ASX) to an all-time closing low of AUD2.48 on Oct. 4, 2011.

The downside has been particularly steep since April 2008, when the government of the Australian state of Victoria changed the way it awarded gaming licenses, shifting from an effective duopoly where Tabcorp and competitor Tatts Group Ltd (ASX: TTS, OTC: TTSLF) held exclusive rights to own operate poker machines to a system based on awarding licenses to venues.

The event Australians refer to as the “Great Financial Crisis” impacted gaming and wagering activity Down Under, and the company’s announcement of a structural separation created additional uncertainty. Always looming is the threat of government in what is a highly regulated segment of the Australian economy.

But after splitting casino and hotel operations from the core gaming, wagering and keno operations Tabcorp has posted solid if unspectacular results. Management has down-shifted its target dividend payout ratio from 70 percent to 80 percent to 50 percent to 60 percent of normalized net profit after tax, but at the same time it’s been able to focus on growing its businesses through investment and to maintain a decent balance sheet.

At these levels–it closed at AUD3.01 per share in May 17 trading on the ASX–Tabcorp is priced to yield 10.6 percent. The dividend rate does vary based on operating results and is not fixed in the manner of North American dividend-paying companies.

But revenue continues to grow and underlying earnings are healthy, even in this difficult environment. And management recently refinanced the company’s fiscal 2013 maturing debt. Tabcorp has also secured important long-term licenses over the past year, removing some of the ever-present uncertainty that comes with this territory.

The market is beginning to recognize Tabcorp’s potential. But we can still pick it up at bargain levels and lock in what’s likely to be a dividend yield well in the neighborhood of double digits while we wait. And a favorable court ruling over recovery of license fees paid to Victoria in respect of the license that was abrogated by the April 2008 decision could push the stock to AUD3.50 by year’s end. 

Tabcorp Holdings is a buy under USD3.15 on the ASX or using the US over-the-counter (OTC) symbol TABCF for riverboat gamblers with plenty of risk capital to put at work on a high-risk play subject to several potential variables. The US OTC-traded American Depositary Receipt (ADR), which is worth two ordinary, ASX-listed shares, is a buy under USD6.30.

For more on Tabcorp, see this month’s issue of Big Yield Hunting.