by Lawrence Meyers | March 22, 2012 9:30 am
The entertainment industry has always attracted attention, and lots of capital. Movies can be extremely profitable endeavors, and if you can find the right people with the right experience, solid returns are available in independent film investment.
You’d also think that with all that overpriced popcorn and candy at movie concession stands that movie theaters would make for a great investment. That’s not the case anymore on a capital gains basis. However, movie theaters can be a good income investment.
Two sticking points about movie theater as investments have kept me away from them. First, they tend to carry a lot of debt, which is drawn down when the cinemas are built, and that debt tends to be comparatively expensive (7% or more in annual interest).
In the old days, when movies had little competition, that wasn’t such a big deal. Today, however, that’s the second sticking point: Movie theaters have tons of competition — from high-definition home theaters to Netflix (NASDAQ:NFLX) to the video-on-demand offerings of satellite TV such as DirecTV (NYSE:DTV) and DISH Network (NASDAQ:DISH) and cable providers like Time Warner Cable (NYSE:TWC). Then there’s the Internet, where you can watch what you want, where you want, when you want.
Even worse, box-office admissions have been falling dramatically over the past decade. That isn’t just due to competition — ample evidence suggests it’s also due to content that audiences have lost patience with. The fall in admissions has been partially offset by higher ticket prices for regular films, as well as fads like IMAX (NASDAQ:IMAX) and 3D.
This can’t go on forever, and these are all reasons why movie theater stocks haven’t performed well historically. What they do well, however, is generate cash flow.
Regal Entertainment Group (NYSE:RGC) operates over 6,600 screens in the U.S. Its net income has declined in two consecutive years. However, its cash-flow generation is solid. In 2009, it had $300 million of free cash flow, which dropped to $160 million in 2010 but jumped back up to $266 million in 2011.
Regal’s dividend history is spotty, but it has paid something every year, and currently the yield is 6%. At the end of 2010, the company paid out a special $1.40 dividend on top of the 84 cent payouts during the year. I think Regal is a solid income addition to a portfolio.
Cinemark Holdings (NYSE:CNK) is on slightly better financial footing than Regal, with only $1.7 billion in debt compared to Regal’s $2 billion, and $521 million in cash vs. $200 million for Regal. The company did see a 9% drop in net income from 2010 to 2011, but free cash flow has been increasing — from $52 million in 2009 to $108 million in 2010 to $207 million in 2011.
Cinemark’s dividend history is more consistent, currently yielding 3.8%. With its increasing cash flow, look for it to either pay down debt, add more screens or boost the dividend.
I would avoid Carmike Cinemas (NASDAQ:CMKE). Although it has only have $300 million in debt, that debt is costing 11% annually in interest. Plus, the company has racked up losses three years running, and it doesn’t pay a dividend.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books.
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