With Netflix, home streaming, and the emergence of a variety of other home entertainment options, we can easily see that Cineplex’s (TSX:CGX) industry has been disrupted.
But what we can also see is that Cineplex’s management has come up with many different solutions in order to combat this and drive earnings and cash flow higher.
Value-added solutions, such as the VIP movie experience as well as solutions that provide Cineplex customers with complementary experiences, such as in-house amusement centres.
And further to this, Cineplex has upped its capital expenditures to invest in the Rec Room, Cineplex’s entertainment complex offering gaming, entertainment, and food and drink for its patrons.
But is Cineplex’s dividend safe?
Let’s explore.
Cineplex is a cash cow business
A cash cow business that has, in the last five years, generated an average operating cash flow as a percentage of revenue of 14%.
And although this ratio has been declining lately, it is still strong, and it has turned the corner in the first nine months of 2018, coming in at a solid 10%.
Year to date 2018 free cash flow increased 20% to $124 million.
Capital expenditures going down
Cineplex is well past its super high capital-expenditures phase, as the company’s Rec Rooms are now operational in five Canadian cities, and much of the expenditures for that have been made.
In fact, the latest quarter, the first nine months of 2018, capital expenditures were $89 million, a 30% year-over-year decline, and accordingly, free cash flow was $35 million versus a negative free cash flow number in the same period last year.
Attractive dividend is well covered
The dividend yield of 6.06% is high and supported by cash flow.
And although the payout ratio exceeds 100% of net income, on a cash flow basis it is below 70%.
The 10-year compound annual growth rate of the dividend is almost 4%.
Uncertainty subsiding
While uncertainty remains a key roadblock for investors and for the stock, things are improving.
Diversification efforts are bearing fruit, with the “other revenue” segment representing a full 25% of total revenue in the first nine months of 2018, and with the amusement category revenues increasing 11%.
This, in effect, is increasing the long-term growth trajectory of the company.
In the next year or so, visibility should improve, as Cineplex’s diversification efforts will continue to show results, and these results will essentially be the test that the company has to pass.
Final thoughts
Although it is clear that Cineplex has gone through big changes and has had to change with the times, management has shown great flexibility and aptitude in its adjustment, and through its diversification efforts and its value-added offerings the company has created a growth engine for itself as a complement to its stable movie exhibition business.
In my view, Cineplex’s dividend is safe, and for long-term investors who can wait it out, this stock is certainly very cheap and attractive.
