This High-Yield Dividend Grower Should Cut its Dividend Pronto

Cineplex Inc. (TSX:CGX) may have a “safe” dividend, but here’s why it should be cut for the betterment of the company’s future.

| More on:

Cineplex Inc. (TSX:CGX) has fallen into limbo. If you followed my sell recommendations, you would have saved yourself a great deal of pain, as shares are now down nearly 40% from peak to trough. Despite the massive plunge, Cineplex shares still trade at a premium growth multiple with a 32.74 trailing price-to-earnings multiple. That’s really expensive for what seems to be a business that’s suffering from a bad case of stagnated growth … or is it?

The company has made significant moves to diversify away from the traditional movie-and-popcorn business. One could argue that the growth valuation is warranted when you consider Cineplex as a general entertainment company which could have the opportunity to benefit from becoming a major part of the shopping malls of the future.

There’s only one thing that bothers me at these levels though; the medium-term outlook for Cineplex and movie theatres in general is bleak, and Cineplex’s diversification into general entertainment is going to take years. If Cineplex really is a growth business that’s worthy of the premium multiple, it should scrap its dividend and focus all of its efforts on further diversifying its portfolio of entertainment offers.

Why Cineplex should cut its dividend

Cineplex shares currently offer a bountiful dividend yield of ~5%, and many income investors may be wondering if it’s an attractive high-yield growth stock that they should be including in their portfolios.

Cineplex has a shareholder-friendly management team. The dividend has grown on a consistent basis and hasn’t been cut over the past decade. While that may seem like good news to investors, I actually think it’s bad news for contrarians looking for Cineplex to rebound, as I believe Cineplex’s payout ratio will continue to get stretched over the next few years, as heavily indebted Canadians opt to pass on the $20 candy-and-popcorn combo to go with their $25 UltraAVX theatre tickets. That’s an expensive date night, and it’s simply not worth it when you can “Netflix and Chill” for a fraction of the price!

Over the medium term, I believe Cineplex will run into a brick wall with its box office and concession segments, which will be exacerbated by lacklustre movie releases and straight-to-stream offerings, which will give Canadians even less of a reason to spend money on a night out at the movies.

That means the payout ratio, currently at ~160%, will soar, and I don’t see how Cineplex can lower it without spending a great deal on its entertainment expansion initiatives.

I think Cineplex should do everyone a favour and cut the dividend now and go all-in with its entertainment diversification efforts. The revamped Playdium, I believe, will be a hit, but the roll-out is going to take a lot longer than expected and probably won’t save Cineplex from another year of dwindling movie ticket sales.

Management needs to roll up its sleeves and put all of its resources into acquiring and expanding its portfolio of entertainment options as consumer demands continue to change over the next few years. Millennials clearly prefer experiences over materialistic goods, so there’s a huge window of opportunity to become a growth king again.

Unfortunately, I think Cineplex will keep its dividend intact for as long as it’s able to, as it takes a page out of the book of Corus Entertainment Inc. — a falling knife with a management team that has refused to cut its dividend, even though the cash could be put to much better use.

Bottom line

My view on Cineplex remains the same: income investors and retirees should avoid Cineplex for now, but aggressive contrarians and bottom fishers may wish to accumulate shares on the way down. I’m staying away from the stock until the dividend is cut and more light is shed on its long-term growth strategy.

Sadly, I don’t think the dividend will be cut anytime soon, because Cineplex will try to juggle growth initiatives while maintaining a high payout to keep its remaining income investors content.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. David Gardner owns shares of Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix.

More on Investing

edit Jars of marijuana
Cannabis Stocks

Is Tilray Stock a Buy in the New Bullish Market?

Canadian cannabis producer Tilray has underperformed the broader markets in the last five years due to its weak fundamentals.

Read more »

Woman has an idea

3 No-Brainer Stocks to Buy With $200 Right Now

These three stocks are no-brainer buys, given their solid underlying businesses and healthy growth prospects.

Read more »


2 Stocks I’m Loading Up on in 2024

Alimentation Couche-Tard (TSX:ATD) and another stock that are getting too cheap after their latest corrections.

Read more »

grow money, wealth build
Dividend Stocks

1 Top Dividend Stock That Can Handle Any Kind of Market (Even Corrections)

While most dividend aristocrats can maintain their payouts during weak markets, very few can maintain a healthy valuation or bounce…

Read more »

Red siren flashing
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

Three established dividend-payers from different sectors are compelling investment opportunities for income-focused investors.

Read more »

online shopping
Tech Stocks

1 Hidden Catalyst That Could Ignite Shopify Stock

Here's why Shopify (TSX:SHOP) ought to remain a top growth stock investors continue to focus on for the long haul.

Read more »

Oil pumps against sunset
Energy Stocks

Is it Too Late to Buy Enbridge Stock?

Besides its juicy and sustainable dividends, Enbridge’s improving long-term growth prospects make it a reliable stock to hold for the…

Read more »

Man considering whether to sell or buy
Tech Stocks

WELL Stock: Buy, Sell, or Hold?

WELL stock has a lot of upside as the company is likely to continue to grow, posting positive earnings in…

Read more »