A high dividend and room to grow

Having come off a bad year for box office receipts, consumer stock Cineplex is determined to diversify its revenue streams so it’s not dependent on the fortunes of the latest movie released. These diversification efforts could pay off in the next couple of years. In the meantime its annual dividend of $1.74 a share yields a generous 5.9 per cent and has further room to grow.

Cyclical_Consumer_StockCyclical consumer stock Cineplex Inc. (TSX—CGX) is a Toronto-headquartered leading entertainment company that operates in the film entertainment and content, amusement and leisure, and media sectors.

Cineplex is pursuing a diversification plan to reduce it reliance on the fortunes of the box office. So far the strategy has yet to pay off, as total revenue for the first quarter was relatively flat compared with the same period last year. The revenue strength of the company’s new businesses was offset by a decline in exhibition, or movie, revenue caused by a 9.3-per-cent attendance decrease.

An example of Cineplex’s new businesses is The Rec Room, which was started in Edmonton in September 2016. The Rec Room’s locations include dining experiences, live entertainment, amusement gaming and more under one roof. In the first quarter, The Rec Room contributed $6.9 million to Cineplex’s revenues, an increase of about 330 per cent over $1.6 million last year.

For the three months ended Dec. 31, 2018, Cineplex made $15.2 million, or $0.24 a diluted share, compared with $23.0 million, or $0.35 a share, in the same period of 2017.

Box office weighs on revenues

Revenues declined by 0.9 per cent to $390.9 million, due largely to a 7.2-per-cent decline in box office revenues, which accounted for $181.4 million of overall revenue. With the exception of media, revenue in other segments rose, led by the amusement segment, which saw its revenue jump 20.5 per cent to $49.9 million.

Adjusted free cash flow decreased 10.9 per cent to $38.6 million. This is a metric management uses to determine how much of a monthly dividend the company will pay. The dividend is targeted at an annualized rate in the range between 60 and 85 per cent of adjusted free cash flow per share.

Free cash flow per share was $0.61 for the first quarter, down from $0.68 last year. Based on the declared dividends per share of $0.42 for the quarter, the payout ratio currently sits at 68.9 per cent.

Given that this dividend is within the targeted range, management raised Cineplex’s May 2018 dividend to $0.145 a share from $0.14 previously.

Shares of Cineplex are well off their high of $53.60 set last July, and now hover just above their 52-week low of $27.56. At these levels, we see the potential for a strong recovery in the shares, assuming the company’s diversification initiatives begin to pay off later this year and in 2019.

Then too, box office performances have always been notoriously volatile (see below). Better to purchase the stock when the box office is doing poorly in anticipation of better movies in the not-too-distant future.

This cyclical consumer stock trades at a high 24.4 times the $1.21 a share that Cineplex should earn in 2018. However, it trades at a more reasonable 9.4 times the company’s projected cash flow of $3.15 a share. And its annual dividend of $1.74 a share yields a generous 5.9 per cent.

Cineplex is a buy for strong recovery potential and a high dividend that has further room to grow.

The flicks’ fickle box office

A poor year for movies in 2017 was detrimental to Cineplex’s share price. The movie industry box office suffered a 0.6-per-cent decline, and Cineplex’s box office decreased 2.5 per cent.

Box Office revenues, of course, are highly dependent on the quality and appeal of films released by the major motion picture studios. And on this front, Cineplex is optimistic that 2018 will see the release of a strong slate of films.

Already, Black Panther has smashed box office records, grossing more than US$1.3 billion worldwide, the 10th-biggest global grosser of all time. Other promising films yet to come include Jurassic World, Ant-Man and the Wasp and Mission Impossible 6.

This is an edited version of an article that was originally published for subscribers in the June 8, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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