Billionaire Warren Buffett likes to tell investors to look for a company with a sustainable competitive advantage, something he likens to a castle moat. It protects from competition, one of the biggest threats to any business.
It’s pretty obvious Cineplex Inc. (TSX:CGX) has such a moat.
The company dominates the movie theatre market in Canada, boasting a market share of more than 80%. Its largest competitor has around 10% of the market, with the other 10% of the market incredibly fragmented.
Cineplex has leveraged this dominant position nicely. It has partnered with Scotiabank to create the Scene program, which lets some eight million Canadians earn points on purchases they can use towards free movies.
It also has expanded concession options, started showing events like UFC fights and competitive video game events on its big screens, and is expanding its arcade concept into more and more locations.
Cineplex isn’t just stopping with movies. It has leveraged its expertise in digital signage into a real business, creating new menu boards for chains like McDonald’s Canada and Tim Hortons, as well as sticking screens in retailers like Wal-Mart.
As these businesses have grown, so have dividends. Five years ago, Cineplex was paying investors a monthly dividend of $0.1075 per share. These days, the payout is $0.135. That’s not bad dividend growth, and the 3.2% yield is attractive in a low interest rate world.
Perhaps the only issue with Cineplex is valuation. With shares trading hands at more than 25 times trailing earnings, investors sure aren’t getting a bargain.
