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Income Investors: Does Cineplex Inc. (TSX:CGX) Stock Belong in Your Portfolio?

Cineplex (TSX:CGX) stock has climbed 8.4% in 2019 so far as of close on January 15. Shares are still down 15% year over year. Cineplex appeared to gather momentum in the final months of 2018 before a third-quarter report in November sparked a sell-off that sent the stock down to 52-week lows.

The third-quarter results were met with scrutiny after it was revealed that Media revenue fell 16% year over year to $33.5 million. This was primarily due to the decline of cinema advertising, which Cineplex leadership attributed to the “cyclical nature of the business.” This is not the first time Cineplex has attributed struggles to a mere “blip.”

In the company’s defence, North American cinemas did experience an impressive rebound in 2018. Cineplex CEO Ellis Jacob had expressed confidence after a brutal 2017 that attendance would bounce back in the following year. Top Disney properties like Black Panther, Star Wars: The Last Jedi, and Avengers: Infinity War all contributed to a strong year for theatres in 2018. Films on the slate in 2019 should also boost investor confidence.

A new study conducted by Ernst & Young’s Quantitative Economics and Statistics group has challenged the notion that Netflix and other streaming giants are negatively affecting theatre attendance. Nearly half of those surveyed who said they had not visited a movie theatre in the past 12 months also said they did not stream any content online. The survey also revealed that 18% of those who avoided cinemas streamed online content for eight or more hours per week.

This year will see the entry of even more big players into the streaming content war. Disney is expected to launch its own streaming service, which will host original content, new and old, at a reduced rate compared to Netflix. AT&T will launch a three-tiered streaming service in late 2019 that will offer films from WarnerMedia’s catalogue and original series, including content from HBO.

Cineplex is expected to release its fourth-quarter and full-year results for 2018 in late February. The stock last had an RSI of 59 as of close on January 15. This indicates that the stock is veering towards overbought territory past the midway point this month. So, is the stock worth it for investors seeking income right now?

It is concerning that Cineplex stock was unable to finish 2018 in the black after a record-setting year for theatre attendance. Cineplex was blindsided by poor Media revenue in Q3 2018, but it is facing other challenges going forward. The company is set to expand its Amusement offerings in 2019 and beyond and will need to deepen its revenue in this segment if movie-going trends persist.

Cineplex does offer a tasty monthly dividend of $0.145 per share, which represents a 6.2% yield. However, this will not satisfy income investors considering its steady decline over the past three years. Shares are down 41% over a three-year period as of close on January 15.

Investors should be cautious of this early-January bump at Cineplex. The smart bet is on volatility roaring back, and Cineplex stock is priced at a premium right now.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Netflix and Walt Disney. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix and Walt Disney. Walt Disney is a recommendation of Stock Advisor Canada.

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