Everybody and their grandmother is on the hunt for dividend stocks. Thanks to quantitative easing, the yields once found in stalwart bonds are gone for the time being. So grandma and everyone else has been pushed further out on the risk curve in order to replace the dividends lost when bond prices rose.
The key for dividend investors, particularly those in retirement, is not treading too far out on the risk curve. For all the talk of high yields from MLPs and BDCs and mREITs, there’s a lot of risk in these names. While some names are safer than others, many of these stocks are tied to interest rates. Even a small rise in rates could harm the stocks.
Fortunately, there are plenty of other dividend stocks in the market that offer decent yields that are nothing to sneeze at. By that, I mean stocks yielding 3% or more. That’s a nice, generous amount for a company that is stable enough to pay regularly.
One area where you can find names that fit the bill are movie exhibitors, like AMC Entertainment (AMC). I’ve always cautioned against investing in pure-play production entities because there’s tremendous risk involved in financing movies. You just don’t know if any one film is going to make its money back and, in fact, they very often do not. Instead, a diversified conglomerate that happens to also produce movies is a safer bet, which is why I own Walt Disney (DIS).
Distribution is the preferred choice in this medium, as there’s no risk associated with just sending movies out to the public, for which you collect fees. That’s true of any industry, and if you’ve read my column, I particularly love distribution plays in manufacturing and industry.
However, exhibition has a lot going for it, if you choose the right company. AMC stock is a solid bet. The reason is that exhibition houses have a fairly standard model that has had repeated success. AMC stock, for example, draws down mortgage debt to finance the construction of the movie house. Hollywood graciously provides tons of content to go into those houses. There’s rarely a shortage of movies, and there’s enough diversity in the offerings that a few will be big hits, many will do OK, and only a few will bomb.
What all the movies have in common for AMC stock, however, is that patrons pay to see them. If a movie stinks, it will quickly be replaced by another. The theater managers and chain owners will be able to shift their offering mix to maximize revenue, using all kinds of data and surveys and awareness ratings provided to AMC stock by the marketers.
Add to this the fabulous mark-up on concessions (10x for popcorn), and exhibitors are nothing more than cash flow generators, period. Even better, despite the declining quality coming out of Hollywood, they maintain pricing power. Movie ticket prices have risen at almost twice the rate of inflation.
That cash is either used to renovate existing theaters, pay a dividend or expand the footprint by building or acquiring new theaters.
AMC was public, got bought out and taken private by a Chinese company, which has since spun it back off as a public vehicle. The acquirers cleaned up the balance sheet and improved operating efficiency to the point where the company just announced a dividend of 20 cents per share quarterly, or about 3.5% in yield.
AMC is a massive chain with almost 5,000 screens in the U.S. With its financial situation improved, its business model on track to generate cash flow, this is a pretty safe dividend bet. Others in the sector to look at include Regal Cinemas (RGC) with its 4.4% payout and Cinemark Holdings (CNK), which pays 3.1%.
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As of this writing, Lawrence Meyers was long DIS. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.