Cineplex (TSX:CGX) has failed to sustain a rally since the implosion that I called back in the spring of 2017. Although management has done a top-notch job diversifying away from the box office, with Rec Room and other entertainment and amusement offerings, the company is still at the mercy of Hollywood over the next few years or so.
The stock is now down 56% from its peak, and as the content war between video streamers takes it to the next level, I find it hard to believe that heavily indebted Canadian consumers would be willing to swipe their credit cards to watch theatrical releases that may have a lower budget than the queue of unwatched films that have just been sitting around on Netflix.
To add even more salt in the wounds of the theatre giant, Disney’s recently announced US$12.99 package, which includes Disney+, ESPN+, and an ad-supported Hulu could be headed to the Canadian market a lot sooner than most would think. Such a package, when combined with Netflix, is more than enough to keep Canadians couch-locked indefinitely.
Is Cineplex’s dividend in danger?
Cineplex’s dividend has become stretched — no doubt about it. The yield has more than doubled over the past five years, as shares fell into a tailspin. Although the payout ratio has broken the triple-digit mark, I don’t think the dividend is at risk of a cut because free cash flows still cover a majority of the payout.
That said, I think dividend hikes are out of the question for the time being. Moreover, I believe Cineplex should reduce its dividend, despite having enough financial flexibility to cover it, along with its investment initiatives.
The box office segment will probably never bounce back to its pre-2017 highs. Video streaming is the new way to consume video, and unless Cineplex can further accelerate growth in its entertainment business or offer a more exceptional value proposition to prospective moviegoers, I don’t think the 19 times trailing earnings multiple is deserved.
If you’ve got a time horizon of a decade or more, however, it may make sense to sit on Cineplex for the nearly 8% yield. But don’t expect multi-bagger returns, because the stock could still shed a quarter of its value before it grows its entertainment offerings by enough to become a Dave & Busters Entertainment type of play.
In short, the dividend is safe — on paper. But it may not be safe if management wants to go all-in on its diversification efforts. If I had to bet, I’d say management will keep its dividend intact to keep its remaining investors happy.
