Over the past handful of years, there hasn’t been much to celebrate for Cineplex (TSX:CGX) shareholders. On average, the company’s stock price has dipped by 7.8% annually. Over the past year, it is down 19%, and it has lost approximately 4% of its value thus far in 2019.
Earnings and revenue have both been trending downward. In fact, the company has posted negative earnings growth over the past five years. This year, the expectation is for a 37% dip in net income. Yikes. Those are not the numbers investors like to see.
At this point, the only positive has been the company’s dividend. Cineplex is a Canadian Dividend Aristocrat with an eight-year dividend-growth streak. It currently yields 7.59% and has averaged low single-digit dividend growth. Unfortunately, even the company’s dividend is looking suspect. As of writing, the dividend accounts for 209% of earnings.
On Thursday, Cineplex posted second-quarter results that topped estimates. Is the company finally turning a corner?
Record second-quarter results
It was a strong quarter for Cineplex. Earnings of $0.31 beat by $0.02 and revenue of $439.25 million beat by $9.85 million. While revenue represented 7.4% year-over-year (YOY) growth, net income dropped 20% from the second quarter of 2018. Revenue represented a quarterly record for the company.
Other positive takeaways included a 13.1% rise in adjusted free cash flow (FCF) — a 2.9% jump in box office revenues per patron, and a 6.8% rise in concession revenues per patron. Unfortunately, theatre attendance dipped once again (-1.8%) and total attendance for the year is down by 8.8%. In comparison, North American box office receipts are down 6.6%, as it had tough comps from 2018.
The company’s diversification strategy is shielding it from lower YOY box office results. Its Amusement and Leisure (A&L) segment experience healthy growth across all platforms. Amusement Solutions reported record quarterly revenue of $48.4 million, and its Rec Room grew revenue by 33.4% to $20.9 million. In total, the A&L segment accounted for approximately 13.2% of total revenue. This is up from 11.8% a year ago.
Is the dividend safe?
Shareholders have been waiting patiently for the company to turn around. A mentioned, one of the last remaining attractive aspects of the company is its dividend. The good news is that the dividend situation is not as dire as it looks to be on the surface.
It has been investing heavily into its A&L segment, which has impacted earnings. When compared against free cash flow (FCF), however, the dividend looks to be well covered. Over the past 12 months, the company has generated $2.75 FCF per share. This was more than enough to cover dividends of $1.75 paid out over the same period. The payout ratio as a percentage of FCF was only 63.6%.
Considering the company raised dividends by 3.4% this past May, it must be confident that it will continue to generate robust cash flows.
The second quarter was a welcome sign of relief for the company. On the day of earnings, Cinplex’s share price jumped by 6.70%, injecting some much-needed green into investors’ portfolios. The company also pointed to a bullish second half of the year for the box office.
Third-quarter attendance is already up 10%, and there are a few key films coming out, such as IT: Chapter 2, Joker, and Maleficent: Mistress of Evil, which should be more than enough to beat a soft third-quarter film schedule last year. Not to mention, the final chapter in the Star Wars saga, The Rise of Skywalker, is expected to take over this holiday season.
Investors can be cautiously optimistic for a strong second half of 2019.
