Canadian entertainment company Cineplex Inc. (TSX:CGX) has dropped dramatically this year, presenting investors with an interesting contrarian play in a sector which has been largely pushed aside by investors in favor of other growth sectors providing increasingly attractive upside given the changing dynamics of the stock market of late.
With poor earnings results the past two quarters driven by disappointing box office results and a slate of movies which has proven to be less than profitable for North American cinemas, Cineplex stands as the most significant option for Canadian investors looking at this space for dividend income.
Cineplex’s 4.4% dividend paid on a monthly basis is certainly something income-focused investors have honed in on following a collapse of more than 25% in the company’s share price since the beginning of the year.
The drop in Cineplex’s equity valuation has resulted in a corresponding increase in the company’s underlying dividend yield, providing long-term investors with an incentive to buy now with the expectation the company will return to its earnings growth profile over time.
While Cineplex has maintained a relatively strong track record of growing earnings, I believe that the most recent earnings reports from Cineplex represent significant long-term headwinds investors should be concerned about.
Still valued at a relatively rich multiple, should earnings for Cineplex continue to underperform in the quarters to come, I expect further share price depreciation to continue, along with pressure on the company’s bloated dividend yield.
The question how stable Cineplex’s monthly dividend will be in the future will reflect the changing operating environment for the company, something investors need to take into consideration before making a long-term bet on this company.Invest Wisely, my friends.