TFSA Investors: Double Your Money With This Truly Undervalued Dividend Stock

Cineplex Inc. (TSX:CGX) offers a 7% dividend yield and the potential for explosive returns as it continues to diversify into higher-growth areas.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published April 4, 2019 8:00 am EDT

Good times are good. Investors enjoy the feeling of watching their TFSA portfolios grow and their wealth rise along with the market.

But while growth stocks have driven this massive rally in the S&P/TSX Composite Index, which has sent it to levels approaching all-time highs, there may be signs that value stocks are setting up to make a comeback.

There is reason for caution in the market, with the yield curve inverting and consumer debt at record highs, so it makes sense to position our portfolios for value in the face of a slowing economy.

Consider value stocks that do not factor in much good news have explosive upside. Would you like to be in on this?

The cumulative TFSA allowance is currently $63,500 and the 2019 contribution allowance is $5,500, so you have room to use enough money to make a real difference.

You can potentially double your money in short order by adding the following undervalued dividend stock to your TFSA today.

Cineplex (TSX: CGX), Canada’s leading film exhibition company, is slowly turning into more of an entertainment company offering much more than its legacy movie theatre experience.

Trading 55% lower than its 2017 highs, Cineplex stock offers investors a dividend yield of 7.15% and is trading at a price-to-earnings ratio of 19 times this year’s consensus earnings and 17 times next year’s consensus earnings.

Cash cow business

Cineplex is a cash cow business that has, in the last five years, generated operating cash flow as a percentage of revenue of almost 15%.

2018 free cash flow of $93 million is a significant improvement over 2017 and is a snapshot of the cash flow generation capability of the company.

Diversification

Uncertainty in Cineplex’s diversification efforts is subsiding, as is the capital investment necessary to pull of this plan.

Diversification efforts are bearing fruit, with the “other revenue” segment representing a full 25% of total revenue in the first nine months of 2018, 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.

Cineplex has responded brilliantly to the changing landscape.

From the introduction of premium-priced theatre experiences to a revamping of its in-house food services options and a focus on its Scene loyalty membership, Cineplex has been driving increased revenue per patron as well as increased brand loyalty.

Further to this, Cineplex has responded by diversifying into other complementary businesses where it can leverage its brand and its expertise — businesses such as e-gaming, recreation rooms, and media.

As these efforts bear fruit, Cineplex stock has the potential for significant gains, and as such, it is a great addition to your TFSA portfolio.