Does Cineplex Inc. Belong in Your Portfolio?

Being of the millennial generation, I honestly believed that old-school movie theatres were going to disappear. And that meant companies like Cineplex Inc.  (TSX:CGX) would be on the out as people moved away from overpriced movies and concessions.

I was wrong.

Recognizing that times were evolving, Cineplex moved with them, modifying its business model, so it wasn’t entirely dependent on Hollywood to provide amazing movies. It became an entertainment and media company rather than just a theatre company. And frankly, it’s working.

In its Q1 earnings results, the company revealed that attendance increased 17.4% year over year to 20.6 million, an all-time quarterly record. Its net income increased by 103.8% to $21.5 million. Its food service revenues increased to $112 million. Finally, its media revenues increased 13.7% to $33.1 million. Across the board, the company broke revenue records.

There are a few parts that are of particular interest to me. The first is media revenue. When people show up to see a movie, they might sit in the theatre for some time before it starts; this is an ample opportunity for Cineplex to generate revenue from ads. And it has become so good at signing advertising contracts, it now manages ads for Tim Hortons Tims TV. As this exposure grows for Cineplex, it’ll be able to charge more competitive rates for advertising, increasing revenue even further.

Another part of the business that interests me is its core movie theatre business. While it’s true that depending on Hollywood can be a risky business, if we look at what Disney alone has planned for the next five years, it’s easy to imagine that people will be coming into the theatre much more often. With multiple Star Wars and Marvel movies planned, not to mention Fast 8 in April 2017 and numerous other high-quality movies, I expect Cineplex to continue generating considerable revenue from the theatre.

The final part of Cineplex that intrigues me is its Rec Room initiative. These are large, multiple-purpose rooms designed to get money out of people’s hands at every turn. Between food and beverages plus video games, there’s no doubt that families can turn to these for hours of fun. Unlike a movie, which has a defined start and stop time, Rec Rooms are open ended, which increases the potential for generating revenue.

All of this makes Cineplex a very strong company going forward. But what is also very appealing about this stock is the fact that it is actually a very lucrative dividend-growth company that has been increasing its dividend habitually.

Between 2010 and 2015, the dividend grew by more than 22% from $1.26 per year to $1.54 per year. The company announced an additional increase in 2016, bringing the dividend to $1.62 per share, making it the sixth consecutive year in which the yield improved. Further, with a payout ratio of 62%, so long as earnings continue to rise, that dividend should continue to follow.

The one negative is that people now know Cineplex is a great company to own. Because of that, it is an expensive stock. However, sometimes it is better to get a great business at a fair price than a fair business at a great price. And in this case, Cineplex is a great business.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of Walt Disney. Walt Disney is a recommendation of Stock Advisor Canada.

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