3 Reasons Cineplex (TSX:CGX) Stock Is an Appealing Buy

Get dividend income and capital gains with Cineplex Inc. (TSX:CGX), which offers investors an undervalued, cash flow-rich stock that pays out a generous 7.56% dividend yield.

| More on:
Businessmen teamwork brainstorming meeting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Cineplex (TSX:CGX) stock, the long-standing Canadian movie exhibition giant, has certainly fallen hard in recent years off the slowing trend in movie watchers going to the theatres and the rapid emergence of other options such as Netflix, Crave, and streaming services, to name a few.

But one thing is curious to me: this risk of shifting movie-watching preferences was well known back in early 2017 when Cineplex stock was hitting all-time highs. Yet Cineplex remained a market darling among analysts as well as general investors, despite the fact that it was trading at 40 times earnings and it was entering its high-spending years on its diversification efforts.

Risk, risk, and more risk was on the table, and as such, I’ve suggested staying away.

Today, the stock is trading 56% lower than the highs of 2017 at a 27 times multiple. It is generating cash flow at a feverish pace, it is well along its way in its diversification efforts, and it pays a generous, well-covered dividend.

Yet, despite all this, investors are staying away, not recognizing its value.

Here are the three reasons to buy Cineplex stock.

Cash flow

In 2018, cash flow increased 36% to $209 million, and this acceleration continues into 2019. Cash flow from operations in the first quarter of 2019 increased again by 33%, as the decline in box office revenue continues to be partially offset by the increase in food service and “other” revenue.

With declining expenses due to the big spending on diversification efforts, we can expect to see a ramp up in Cineplex’s earnings and cash flow numbers going forward.

With a free cash flow yield of north of 6% and rising, Cineplex is in a good spot, and investors have an attractive entry point.

Generous, well-covered dividend

Cineplex offers investors a dividend yield of 7.56% — a very generous yield that is supported by ample and growing cash flow. And while dividends paid are not covered by net income at the moment, with expenses declining this year and revenue from Cineplex’s diversification efforts accelerating, we can expect this to be a temporary thing.

With the recent first-quarter release, management took the opportunity to boost its dividend in a move that goes contrary to what many investors were thinking. The annual dividend was increased by 3% and now stands at $1.80 per share.

Strong box office expected this year

This year is expected to be a strong one for the box office segment. Avengers Endgame, which has smashed box office records, is but one of the movies that support this thesis.

Final thoughts

Investors, you would do well to add Cineplex stock to your portfolio, collecting a hefty dividend while waiting for growth to accelerate.

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 Karen Thomas has no position in any of the stocks mentioned. David Gardner owns shares of Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix.

More on Dividend Stocks

exchange-traded funds
Dividend Stocks

2 Dividend ETFs With Significant Exposure to the TSX’s Top 2 Sectors

Two dividend ETFs offer ideal diversification because of their exposure to the TSX’s two strongest sectors.

Read more »

Illustration of bull and bear
Dividend Stocks

3 Top ETFs Canadians Can Buy Amid a Bear Market

Monthly dividend-paying ETFs allow investors to generate a stable stream of recurring income, making them ideal bets in a volatile…

Read more »

Oil pipes in an oil field
Dividend Stocks

3 Dividend-Paying TSX Energy Stocks for TFSA Investors

TSX energy stocks will likely continue to beat broader markets!

Read more »

Portrait of woman having fun in the street.
Dividend Stocks

3 Fantastic Stocks for Young Investors

You are never in a better position to be daring with your investment than early on in your life. But…

Read more »

data analyze research
Dividend Stocks

1 Investment Strategy That Works in a Higher-Rate Environment

Market analysts say that dividend investing is back in style and a winning strategy in a higher-rate environment.

Read more »

Dividend Stocks

Top 3 REITs That Are Yielding Over 3%

Canadian real estate investment trusts such as Dream Industrial offer you the opportunity to benefit from a steady stream of…

Read more »

Target. Stand out from the crowd
Dividend Stocks

Beginner Investors: 1 Top Dividend Stock Pick to Buy for Stagflation

Fortis (TSX:FTS)(NYSE:FTS) is a great dividend stud to buy and hold through stagflationary, recessionary, or inflationary times.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

Tax-Free Passive Income: 2 Oversold TSX Dividend Stocks for TFSA Investors

These top TSX dividend stocks look cheap to buy today for TFSA investors focused on passive income.

Read more »