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Here’s a Powerhouse 7.7% Dividend Stock for the Contrarian Investor

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When investors think of a dividend stock, the higher dividend yield ones usually get a bad rap. And very often, this is for very good reasons, like unsustainable payout ratios, over-leveraged balance sheets, and deteriorating cash flows. But once in a while, we come across a high-yield dividend stock that is showing underlying strength.

This is the case with Cineplex Inc. (TSX:CGX) stock. With a dividend yield of 7.73%, a dividend that is increasingly covered by cash flows, a solid balance sheet and tons of upside, this stock is one that contrarian investors should consider adding to their shopping list.

It is not without its risks, but if the company’s diversification strategy works, there is tons of upside to be had. In the meantime, investors have a very generous dividend yield to help keep them patiently waiting.

Let’s find out what makes Cineplex stock a great contrarian pick.

Strong cash flows

Since 2014, Cineplex has grown its operating cash flow by 24%, for a compound annual growth rate (CAGR) of 4.4%. Furthermore, in 2018 free cash flow as a percentage of sales was a respectable 6%.

It’s true that the movie exhibition business is being disrupted and isn’t a very fluid situation right now, with nobody really sure how this will ultimately play out. Many investors are thinking it’s a doomsday scenario for Cineplex, but if we look at attendance and box office numbers, and its corresponding revenue and cash flow numbers, we can see that this scenario has not played out.

Since 2010, attendance is actually up 3.4%, and box office revenue is actually up 21%. We can therefore see that attendance is holding up pretty steadily, while the company has come up with creative ways to get more out of each theatre attendee by introducing value-added offerings, such as the VIP movie experience, reserved seating, as well as an expanded food offering.

Looking ahead, we have a lot to be excited about. Box-office results rely heavily on the quality and popularity of the movies released, and this year has seen a very strong list of movie releases such as Avengers: Endgame, and the upcoming The Lion King release later this month, and the Star Wars release in December. These hits can be expected to drive a very strong box-office result for Cineplex this year.

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Increasing diversification

Watching a movie is a very different experience today than it has been in the past. With many more choices of where, when, and how to watch, Cineplex does not own the business like it used to. But this is nothing new, and Cineplex has been preparing for slower growth in this business for years now.

With stepped up diversification efforts in the last few years, Cineplex is making good progress into higher growth areas such as e-gaming, entertainment rec room complexes, and more. In fact, the company’s other revenue segment grew 14% in the latest quarter, and now represents just under 30% of revenue. This is a far cry from where it was five years ago, and shows the progress that Cineplex has made in its diversification efforts.

A generous and growing dividend

Cineplex stock currently offers investors a very generous 7.73% dividend yield, at a time when the company’s diversification efforts are on the cusp of becoming an even bigger contributor, thus changing the growth profile of the company for the better.

And we can have confidence in this dividend, as it is increasingly being covered by free cash flow and as Cineplex has a good track record of paying out a dividend every year for the last ten years. This dividend has grown consistently, at a compound annual growth rate of 3.5%, to the current annual dividend of $1.80 per share.

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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.

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