Just in the last month, shares of Cineplex Inc (TSX:CGX) dropped by more than 18%, bringing the year-to-date decline to almost 16%. The company which is in the business of operating movie theatres currently offers investors a dividend yield of close to 3.75% paid on a quarterly basis.
Given the stock has not traded at this level since early 2015, investors may want to give this name a very good look before making the decision to jump in or not.
Thriller or Horror Movie?
Although it has been several years since Canada’s last recession, it is important for investors to appreciate that the revenue gains at Cineplex Inc., which have occurred over the past several years, have coincided with an improving economy. With steadily improving revenues, from $1.171 billion in fiscal 2013 to $1.48 billion in fiscal 2016, the company has increased the top line at a compounded annual growth rate (CAGR) of slightly more than 8%.
The challenge now faced by the company (and investors) is that the increasing top line has not translated down to the bottom line. In fiscal 2013, EPS which were $1.37 for the year declined to $1.27 by fiscal 2016. Although earnings have not moved very much, the next shoe to drop may just be the dividend payment. It may not be sustainable.
In fiscal 2013, dividend per share accounted for close to 102% of total earnings for the year. As the company has continued to increase the dividend payment year after year, the payout ratio has reached eclipsed 125% for the most recent fiscal year.
The Plot Thickens
Moving forward to fiscal 2017, the first two quarters have finally started to show the cracks in the foundation. Earnings which have totaled $0.39 for the first two quarters have been more than offset by the dividend payments which have totaled $0.82 over the same period of time. Potentially, this generous dividend will be sustainable over the long term. If we look behind the curtain to the cash flow from operations (CFO), the company is still trending upwards. In 2013, the dividend accounted for 40% of CFO which increased to more than 60% for the 2016 fiscal year.
Although the company has a significant amount of long term assets (the movie theatres), it is worth noting that the investments in long term assets has started to slow over the past 18 months. The company has a greater proportion of depreciation in relations to investments in long term assets than previous.
Given the recent headwinds of the company during a period of rising tides, investors expecting positive news from this company during a recessionary period may be in for a nasty surprise. Traditionally, many consumers have tended to favour visiting the movie theater for an evening out when money may be a little tighter. At the present time, the movie industry may just be pricing itself out of its own market. At more than $20 per ticket in some circumstances, investors who already got off the train may just have had the right idea.
