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3 Factors That Have Helped Cineplex (TSX:CGX) Become One of Canada’s Highest Yielding Dividend Aristocrats

To be fair, perhaps I’ve been too pessimistic about the outlook for Canada’s largest movie exhibition company, Cineplex Inc (TSX:CGX) and the prospects for its dividend in recent posts here on The Motley Fool Canada.

When the company announced its financial results for the first quarter month, rather than announcing that it would be reducing its regular monthly dividend payout, management and the board of directors decided to go in the opposite direction, instead announcing a 3.4% increase to its monthly dividend payout and raising the size of its annual distribution to $1.80 per share from the previous $1.74.

While I remain skeptical about the long-term future of CGX’s dividend payout for now, I will give credit where credit is due.

Here are three distinct advantages that Cineplex still has working in its favour as we prepare to head into the back half of 2019.

Dominant leadership position within the Canadian market

Despite its recent struggles, Cineplex, operating jointly under the Cineplex Odeon, SilverCity, Galaxy Cinemas, Scotiabank Theatres and Famous Players brands, collectively serves over 70 million guests annually, making it by far and away Canada’s largest theatre chain.

In the case of movie theatre or exhibition companies, scale or the size of a company’s operations can be a decided advantage in gaining an edge over smaller competitors when it comes to things like purchasing rights to screen major motion picture titles.

In this case Cineplex wins the argument hands down.

With a rich history dating all the way back to the 1940s as long as there are movies being screened in Canada, there’s as good a chance as any that CGX will be part of that discussion.

A wise plan to diversify and broaden the scope of its entertainment alternatives

Not so long ago, management announced plans to broaden the scope of its operations to include a broader audience beyond just the moviegoing public.

These plans have included the introduction of several “Rec Room” facilities stretching across the country, offering Canadians the chance to enjoy food and drink while taking in the latest sporting event, watching live music acts, playing video arcade games, ping pong or any combination of the above.

It’s a deviation from the company’s existing business model in that it’s a much more active and lively atmosphere compared to the setting of a quiet, dark movie theatre, but it’s also a move that could pay off in a big way should it be successful in tapping into what could prove to be a brand- new audience.

Going to the movies is almost about as recession-proof as it gets

Despite my criticism of the decision to maintain (and now in Q1, increase) the company’s current dividend payout in light of what are some pretty sizeable capital commitments as it invests in the new Rec Room platform, I have maintained throughout that one of the qualities I like most about movie exhibition stocks is that a night out at the movies continues to be an affordable entertainment option.

Even as chains like Cineplex have continued to raise the price of admission and concession like food and beverages it’s an entertainment option that even for a family of four or five is not going to break the bank.

It’s a simple, even arguably boring business, but then again, that’s not usually such a bad thing when you’re a business owner.

Foolish bottom line

In reporting first-quarter earnings, management attributed its lower year-over-year box office attendance to a difficult comparison against last year’s record-breaking performance from the Black Panther film.

Yet those with long memories may remember that when the box office results for Black Panther originally came out a little more than a year ago, they weren’t seen as being an anomaly, but rather a sign of a reversal in moviegoing sentiment.

Released in April, “Avengers Endgame” set records with its opening weekend box office results, which will likely help to provide a boost to the second-quarter earnings.

Even so, this may continue to prove a choppy ride for those hanging around to cash in on the current 7.70% dividend yield.

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Fool contributor Jason Phillips has no position in any of the stocks mentioned.

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