top dividend stock for 2017 · 2017-01-11 · fool.ca top dividend stock for 2017 the motley fool 5...

Dividend Investor Canada’s

Top Dividend Stock

for 2017

Candidate #1

2 The Motley Fool Top Dividend Stock for 2017 fool.ca

Bryan WhiteLead AdviserDividend Investor Canada

P.S. — As with all of our premium investment services here at Motley Fool Canada, Dividend Investor Canada is fully backed by a 30 day, 100% membership-fee-back guarantee.

So you’re always welcome to “test drive” the service for a full month before really having to decide whether it’s right for you. And if it’s not, no problem! We’ll happily return your membership fee in full. Full details will be made available the morning of Thursday, January 19. So please keep an eye on your inbox!

Top Dividend Stock for 2017Dividend Investor Canada’s

A special message from Bryan White, Lead Adviser, Motley Fool Dividend Investor Canada

Dear Fellow Investor,The next time someone tells you that dividend-paying

stocks are “boring” or have no real growth potential, here’s something you might want to point out…

According to data from renowned Yale economist and market researcher Robert Schiller, over the past century the S&P 500 index in the U.S. is only up about 900% when adjusted for inflation.

Surprised? Most investors are! But here’s the truly shocking thing…

If, over that same time period you had simply reinvested your dividends, that return would jump to an incredible 58,623%.

That’s a 65X difference! And if it’s not proof positive of just how important it is to own stocks that pay dividends, I don’t know what is! But let’s face it… not all dividend-payers are created equal.

Some truly are nothing more than stodgy old “cigar butt” businesses that have no real potential to grow your underlying investment dollars over time.

Meanwhile, some super-high-yielders may simply not have the financial means to continue to pay out such a whopping dividend -- especially if they come from a more cyclical “boom and bust” industry like energy or mining.

And trying to separate the wheat from the chaff can be a very daunting -- and time consuming -- task. Honestly, it’s enough to make many folks just forego investing in dividend stocks altogether.

Which is why I wasn’t the least bit surprised when a recent survey showed that a whopping 98.9% of our Motley Fool Canada readers and premium members would like more guidance on which dividend stocks to buy and when.

It’s also why I am both so proud -- and so excited -- to have been selected to serve as the Lead Adviser for our newest pre-mium investment solution, Dividend Investor Canada, which will have its grand opening on Thursday, January 19.

And because we want you to have everything you need to make a well-informed decision about whether membership in a service like this might be right for you…

In the days leading up to this this historic event, my team and I will be sharing our top three candidates for our Top Dividend Stock of 2017 -- which will also be our first official recommendation within Dividend Investor Canada.

Plus, we’ll be posting a wide variety of other dividend-focused bonus content that we believe you’ll find both very informative and very valuable.

Everyone here is extremely excited about the launch of Dividend Investor Canada and all of the pre-launch festivities that will precede it.

We hope you’ll enjoy everything we’ll be putting together for you -- and that you’ll consider joining us in Dividend Investor Canada when we officially open our doors here in a few short days!

12 January 2017

To helping making 2017 your most profitable year yet,

fool.ca Top Dividend Stock for 2017 The Motley Fool 3

As technology continues to disrupt and change the way we view premium content, media and entertainment companies are being forced to evolve their business models. As consumers, streaming services offered by companies like Netflix and Amazon are increasingly competing for our time and enter-tainment dollars. Further driving this trend is the undeniable resurgence in high-quality television and cable series such as The Walking Dead and Quantico.

“If there is disruption happening, deal with it

up front and get ahead of it.”Those wise words come from a recent interview with Ellis

Jacob, CEO of Cineplex (TSX: CGX). Thanks to foresight and some calculated risks from management, Cineplex is thriving and is well positioned to not only weather the disruptive forces in its industry, but potentially thrive for years to come.

The BusinessYou’ve likely encountered a Cineplex at some point in your

life—the company operates Canada’s largest chain of motion picture theatres. With a staggering 77% market share, Cineplex controls the motion picture viewing market in Canada. It owns and operates 164 theatres spread across the country, attracting 77 million moviegoers annually to its 1,677 screens. Some of the brands under the Cineplex umbrella include Cineplex Odeon, Galaxy Cinemas, Scotiabank Theatres, SilverCity, and Cineplex Cinemas.

The theatres bring in revenue through box office sales, con-

cessions, and advertising. Box office and concession sales tend to ebb and flow with attendance, which is largely driven by the annual film slate. Cineplex is widely recognized as an impres-sive operator with industry-leading operating metrics. As you’ll see below, to gauge the performance of its cinemas, investors ought to look at key metrics such as BPP (box office revenue per patron) and CPP (concession revenue per patron).

*Source: Company presentation

Headquarters: Toronto, Canada

Website: www.cineplex.com

Industry: Industry Entertainment

Volatility: Low

Market Cap: CAD$3,291

Dividend Yield: 3.1%

Cash/Debt: US$24/$442

Free cash flow (TTM): US$91

Dividends (TTM): US$100

Payout ratio: 110%

Total Insider Ownership*: 0%

Recent Price: $51.83

TTM: Trailing 12 Months

Dollar amounts in millions except recent price.*Percentage of shares outstanding owned by insiders

Data as of 01/05/17

Cineplex operates the largest motion picture theatre chain in Canada.

Why we’re considering buying:

• Cineplex is a high-quality, growing company with the ability to consistently raise its dividend payouts.

• The company has plenty of growth initiatives in place to diversify the business and drive higher profit margins.

• It has strong leadership in place to execute on its plan.

Cineplex (TSX: CGX) By Bryan White

4 The Motley Fool Top Dividend Stock for 2017 fool.ca

The performance above has been driven in large part by Cineplex expanding its food offerings and investing in premium ticket pricing.

The company has invested heavily in premium viewing experiences, building IMAX and VIP Cinemas and UltraAVX auditoriums with wall-to-wall screens. Each premium concept has distinct features, but ultimately help drive higher BPP and CPP. In fact, its UltraAVX screens only account for 5% of the company’s total, but generate 14.6% of box office revenue. Year-to-date, premium seating has contributed 47% of total rev-enue from the box office, up from 35% in the year-ago period.

Management also has developed its own in-house food service concepts. Cineplex operates 95 Outtakes restaurants in its theatres serving burgers, wraps, and fries. Other concepts include Poptopia, serving moviegoers specialty gourmet popcorn, and frozen yogurt cafes through its joint venture in YoYo’s. Along with premium seating, these growing food concepts are helping drive the company’s key metrics despite some recent weakness at the box office.

One of the key drivers behind Cineplex’s performance has been longtime industry veteran Ellis Jacob, who took over as CEO and President in 2003. Jacob has worked in the cinema business since 1978. After serving as an executive for Cineplex Odeon, Ellis formed his own theatre business in 1999 called Galaxy Entertainment. Several years later, Galaxy merged with Cineplex. In fact, the Cineplex of today is largely a combina-tion of past mergers and acquisitions.

The passionate and energetic leader has a vision for the future and is determined to build a company that will last. Due to some smart investments (which we’ll get into below), Ellis has Cineplex positioned to not only survive, but actually thrive in a changing landscape.

The OpportunityEllis has followed a growth and diversification strategy that

seems to be paying off. Entering 2017, box office revenue is expected to contribute less than 50% of total revenue. Ellis has repositioned the company introducing a whole host of new, higher-margin revenue streams.

The growth initiative having the most impact today is its Digital Media segment. This business owns and operates digital advertising signs often found in shopping malls and even its own theatre locations, and digital displays found at the point of sale within quick-service restaurants, retailers, and banking locations. It’s the digital display business that has me the most intrigued, since it benefits from the growth in major consumer brands. This business was added in 2013 with the acquisition of a company named EK3. The addition of EK3 gave the Media segment a big boost—it gained a foothold with large franchises such as Tim Hortons, McDonald’s, and Wal-Mart.

While still relatively small, the digital display business is its fastest-growing source of diversification. Revenue grew 70% in the most recent quarter, driven by new client wins at Dairy Queen and A&W Canada. More importantly, the busi-ness comes with estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins from 30% to 40%; EBITDA margins in its core theatre business run in the mid-teens. This is probably the most important growth driver to keep your eye on.

In 2007, Cineplex partnered with Scotiabank to create the SCENE entertainment loyalty program. Today, there are 7.9 million SCENE members in Canada after growing at an av-erage annual rate of 34% since 2007. One in every 5 Canadians is a SCENE loyalty member, reaching an estimated 33% of total households. One of the perks for members is access to the company’s online streaming services, which offer more than 7,000 titles. Yes, Cineplex also offers online streaming!

The company’s more nascent growth initiatives include eSports and a new entertainment concept called the Rec Room. With the recent acquisition of an 80% interest in WorldGaming, Cineplex entered the eSports market, which draws large audi-ences for its competitive gaming matchups. If you’re scratching your head like I was, we’re talking about opponents playing video games in tournaments and leagues. Total viewership worldwide for eSports is expected to reach an estimated 240 million this year, helping drive a total addressable market ex-pected to reach $1 billion in 2017. Cineplex has only invested

fool.ca Top Dividend Stock for 2017 The Motley Fool 5

$15 million in this market so far, but it’s something that could materialize over the next three to five years.

The Rec Room is a new concept that brings a host of the company’s core competencies together. The 60,000-square-foot entertainment centres offer multiple dining and beverage options along with amusement and recreational games including bowling and billiards. The Rec Room also features live entertainment and live sports on mega screens. The first location opened in Edmonton in September, and there are two more openings planned for this year in Calgary and Toronto. Management plans to open 10 to 15 locations over the next three or four years.

Dividend SustainabilityThe company’s ability to generate reliable cash flows and its

strong balance sheet should provide a runway for steady and in-creasing dividend payouts for years to come. Cineplex initiated a dividend back in 2004, and has grown it at an average annual rate of 5% over the past three years. With the stock trading at $51.83, the current dividend yield is 3.1%, with a payout ratio of 52% of total operating cash flow.

Cineplex generates consistent cash flow. Its average oper-ating cash flow (OCF) margin has been 17% for the past three-, five-, and seven-year periods. This consistency also dated back through the financial crisis in 2009, which gives us a good measuring stick for how the company performs in a time of economic distress.

Cineplex currently reinvests around 50% of OCF in capital expenditures, with the majority of the spending going toward growth initiatives. The company estimates that its annual maintenance capital spending requirements are limited to about $30 million, or 13% of OCF. This figure should decline

further as digital initiatives grow as a proportion of the total business, freeing up additional cash flow for dividends, share repurchases, and acquisitions.

Cineplex is also well under its target debt ratio, which adds an additional cushion to the dividend. With a flexible balance sheet, I wouldn’t be surprised if management continues to make small acquisitions to bolster its diversification strategy.

What We’re WatchingIn the near term, we’ll be watching for signs of further prog-

ress in its digital display and advertising business. Specifically, we’ll be looking for the company to expand its client base. Cineplex’s valuation also has our attention—the stock currently trades for 26 times 2017 earnings per share estimates. While we acknowledge Cineplex has a lot of ways to grow from here, we also want to make sure that the growth isn’t largely priced in.

Long term, we’ll continue to watch the company’s core attendance figures for any signs that the core theatre business is struggling. As the broader entertainment industry undergoes change in the coming years, Cineplex’s core business could lose its lustre.

The Foolish Bottom LineCineplex has a lot of traits you typically find in high-quality

companies: capable management, dominant market share, industry-leading operating metrics, and key investments made for future long-term growth.

Looking forward, I think its growth initiatives offer great diversification and have the ability to drive higher returns on invested capital—providing investors a nice combination of stability and growth.

6 The Motley Fool Top Dividend Stock for 2017 fool.ca

How to take the next step with Dividend Investor Canada…

We hope you enjoyed getting the full story on Cineplex, and that it has given you a better idea of why the team is considering naming it their Top Dividend Stock for 2017 -- as well as the first official pick for their Dividend Investor Canada service.

If you haven’t already had a chance to do so, we’d encourage you to also have a look at the “executive summary” video that Dividend Investor Canada analyst Taylor Muckerman and Lead Adviser Bryan White recently recorded, which will give you even more insights into why they have their eye on this unique dividend payer.

We’d also ask that you please be on the lookout for a very special bonus report we’ll be sending you on Friday, January 13… as well as the full details on the team’s second candidate for Top Dividend Stock for 2017, which will be unveiled on Saturday, January 14.

In the meantime, should you have any questions about Cineplex, any of the other free content we’re making available, our Dividend Investor Canada service, or even just dividend investing in general, please feel free to send them to dividends@fool.ca and a member of our team will get back to you as soon as possible.

We’re thrilled that you’ve decided to follow along with all of the festivities leading up to the grand opening of Dividend Investor Canada on Thursday, January 19 -- and we sincerely hope you’ll consider joining us as a Charter Member.

Thank you again for your time and interest, and as always, Fool on!

Disclosure: All figures as of January 5, 2017. All dollar amounts are represented in Canadian Dollars, unless otherwise noted. As of the most recent update (January 5, 2017), David Gardner owns shares of Amazon.com and Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon.com, IMAX, and Netflix.

This report is: (a) for general information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by The Motley Fool Canada, ULC, its employees and affiliates (collectively, “TMF”). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances.

© Copyright: 2017 The Motley Fool Canada, ULC. All rights reserved.

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Published by: THE MOTLEY FOOL CANADA, ULC 1959 UPPER WATER STREET P.O. BOX 997 HALIFAX , NOVA SCOTIA B3J 3N2

This publication is for general information purposes only.

The studies in this report are not complete analyses of every material fact regarding any company, industry, or investment and they are not “buy” or “sell” recommendations.

This publication is provided with the understanding that the authors and publisher are not engaged in the rendering of personalized investment advice. It also should not be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, or sponsorship of any entity or security by The Motley Fool and its affiliates.

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fool.ca Top Dividend Stock for 2017 The Motley Fool 7

How to take the next step with Dividend Investor Canada…

We hope you enjoyed getting the full story on Cineplex, and that it has given you a better idea of why the team is considering naming it their Top Dividend Stock for 2017 -- as well as the first official pick for their Dividend Investor Canada service.

If you haven’t already had a chance to do so, we’d encourage you to also have a look at the “executive summary” video that Dividend Investor Canada analyst Taylor Muckerman and Lead Adviser Bryan White recently recorded, which will give you even more insights into why they have their eye on this unique dividend payer.

We’d also ask that you please be on the lookout for a very special bonus report we’ll be sending you on Friday, January 13… as well as the full details on the team’s second candidate for Top Dividend Stock for 2017, which will be unveiled on Saturday, January 14.

In the meantime, should you have any questions about Cineplex, any of the other free content we’re making available, our Dividend Investor Canada service, or even just dividend investing in general, please feel free to send them to dividends@fool.ca and a member of our team will get back to you as soon as possible.

We’re thrilled that you’ve decided to follow along with all of the festivities leading up to the grand opening of Dividend Investor Canada on Thursday, January 19 -- and we sincerely hope you’ll consider joining us as a Charter Member.

Thank you again for your time and interest, and as always, Fool on!

www.fool.ca

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