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

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.

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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.

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