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Does Cineplex Inc. (TSX:CGX) Stock Belong in Your Portfolio This Summer?

Cineplex Inc. (TSX:CGX) stock fell 2.22% on June 21. Shares have climbed 5.5% over the past month, but the stock is still down double-digits in 2018 so far. Cineplex took a dive after the release of its first-quarter results, but gained momentum as the TSX experienced a May and June rally.

After those first-quarter results, which included a 9.3% year-over-year drop in attendance, CEO Ellis Jacob contended that the struggles at the company were a “blip.” Jacob argued that the movie business had been historically volatile, and that 2017 represented a retreat that would not last. As I’d discussed in the linked article above, there are other reasons to be concerned about the cinema business going forward.

That said, there are also reasons to be optimistic about Cineplex this summer. Box office numbers have impressed so far in 2018, largely on the back of mega hits like Avengers: Infinity War and Black Panther, not to mention the tail end of 2017 releases like Stars Wars: The Last Jedi. Box office numbers posted a record $40.6 billion in 2017, even amid domestic attendance plunging to 23-year lows. According to box office mojo, attendance is up marginally this year. As usual, there will be intense pressure on cinemas to see a better performance than the abysmal 2017 season.

So the box office is a mixed bag. But if that’s the case, why should investors be high on Cineplex?

Cineplex executing its diversification strategy

Although Cineplex leadership has called the decline of the cinema into question, it is acutely aware of the existential risks posed by the rise of streaming and the viewing habits of younger demographics. This is why Cineplex has worked to increase its revenue strength through new businesses.

The Rec Room entertainment complexes have been a bright spot for Cineplex — one that it hopes will provide a steady revenue stream for years to come. Cineplex has plans to open 10 to 15 more of these large entertainment centres heading into the next decade. The complexes range in size from 2,700 square metres to 5,500 square metres, and the cost ranges from $8 million to $10 million.

Cineplex estimates that these complexes will generate revenue of over $10 million per year going forward.

A monster dividend for those seeking income

Cineplex stock has nearly halved in value from the spring of 2017. The stock is down 18.7% in 2018 so far. However, its dividend continues to be attractive, especially with the falling price.

In the first quarter, Cineplex announced a 3.6% dividend increase to $1.74 per share on an annual basis. This represents a 5.5% dividend yield.

Will Cineplex pursue a MoviePass-like service in the future?

MoviePass lets U.S. consumers purchase a $9.95 a month subscription that gives access to one non-premium screening per day. This service has not made its way to Canada, but another option called Sinemia is operating in the country. The service, which has been met with mixed reviews, offers access to Cineplex venues, but there is no official partnership.

Look for Cineplex and the cinema business at large for revenue options going forward. This will be especially important, as the current model is increasingly reliant on revenue from a few yearly blockbusters. The poor performance of Solo: A Star Wars Story demonstrates how precarious such a model can be.

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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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

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