Investors who are looking for income today face a real struggle. Once upon a time, we could turn to the bond market for meaningful and steady income. This interest income was meaningful, with Government of Canada bond interest rates of more than 5% in the 1990s, for example, allowing investors to live off their savings quite easily. Unfortunately, as we know, this is no longer the case. Interest rates are at all-time lows, and this has forced us to look elsewhere for income. One place that investors have turned to in this struggle is dividend stocks. Dividend stocks come in all shapes and sizes, appealing to a wide variety of risk appetites, and they have taken an increasingly important role in investors’ investment portfolios.
In this article, I will highlight Cineplex (TSX:CGX). It is a stock that is by no means without its risks, but it also a stock with a very favourable risk/reward tradeoff. The company has a top-notch management team, a focused strategy, and solid financials. It is also a stock that has been plagued by very pessimistic expectations; hence, it is a very attractively valued stock that has tonnes of earnings upside.
Return of revenue-growth momentum
Total revenue clocked in an 8.3% growth rate in the latest quarter, signalling a return to higher growth for the company. This follows a 7.4% year-over-year growth rate last quarter (Q3 2019) and a 3.9% revenue growth rate in 2018 versus 2017. Driving this revenue growth is its “other” category. This includes Cineplex Media, which is simply digital advertising, and the company’s amusement business, such as its Rec Room offering. The Other category’s revenue increased 17.9% in the latest quarter and now represents 27.5% of the company’s total revenue.
With this, Cineplex’s latest results beat market expectations by a lot. Consensus expectations were calling for EPS of $0.14, and Cineplex delivered EPS of $0.21 — a full 50% higher. It is therefore no surprise that Cineplex stock has been outperforming and is up more than 11% in the last month.
Diversification efforts march on
Over at Cineplex, diversification efforts continue, because the company will continue to respond to market forces in a proactive way, as it has done in the past. With this in mind, we can see that the planned opening of Junxion is the next step toward Cineplex achieving its stated goal of being the company for all things entertainment. As Cineplex’s management put it, Junxion is the Cineplex of the future. It is a 45,000-square-foot complex that will include cinemas, amusement gaming, a food hall, space for outdoor screenings, a stage for live performances, and more. Its first location will be in Mississauga, Ontario, and with a planned opening in late 2020, we will soon see the market’s reception to this new concept.
As previously mentioned, the “other” category now accounts for 27.5% of total revenue, and with this category’s revenue expected to grow by close to 30% this year, we are also seeing scaling of these areas. As a result, we have seen the company’s EBITDA margin increase to 25.4% in the latest quarter versus 14.2% in the prior year.
Foolish bottom line
Cineplex stock offers dividend investors a great opportunity today. With a 7.2% dividend yield that is nicely covered by cash flows as well as rising expectations and estimates, dividend investors have the opportunity to get in on this stock’s upside while receiving a generous dividend.
