You enjoy movies at Regal's theaters, but should you buy this high dividend stock?

 

I recently read an article that listed Regal Entertainment Group (RGC) as a high dividend stock targeted by short sellers.  I hadn't seen Regal on my previous high dividend stock screens, so I was curious to put this stock with my Benjamin Graham inspired mechanical tests.  The bottom line is that the short sellers are probably right.  RGC is not a movie you want in your portfolio at $13.96 per share.  However, what price might Regal become a value basis for investment?

 

Regal Entertainment group (RGC)

Market price: $13.96

Shares: 154.56 M

 

Dividend record: quarterly dividend of $0.18 since Q1 2009, dividend was $0.30 per quarter for years before that.

Dividend yield: 6.02%

Quarterly dividend: $0.21

Dividend payout ratio: 168% (BAD $0.84/$0.50)

 

Earning power:  5 yr. average earning power is $0.95/share; 10 yr. average earning power is $0.76 per share

(earnings adjusted for changes in capitalization)

                EPS          Net inc.         Adj. EPS

2006    $0.56     $86.3 M        $0.56

2007    $2.28     $363.0 M     $2.35

2008    $0.72     $112.2 M      $0.73

2009    $0.62     $95.5 M        $0.62

2010    $0.50     $77.6 M       $0.50

 

I suggest that you try to buy value stocks at below 12 times average earnings.  Regal would have to fall below $11.40 to qualify as a value stock based on its five year average earnings of $0.95/share.  It would become speculative above 20 times average earnings at $19.00.  It still qualifies as an investment basis since it is in between those two extremes.

 

If you take the 10 year view of Regal's earning power, then you get the same result but with a lower average earning power.  The company averaged $118.1 M net income over 10 years.  Divide that average by 154.56 M shares and you get a 10 year average earning power of $0.76/share.  The share price would have to drop to $9.17 to qualify as a value basis (12 times 10 yr. average earnings/share).  It would become speculative at 20 times average earnings/share at $15.20.  I usually like to use the 10 year average earnings when possible to buy low in the value territory.

 

Balance sheet:  This company has a troubling balance sheet.  No wonder short sellers are betting against the company.

Book value per share: -$3.17  (BAD)

Price to book value: -4.4 (BAD)

Current ratio: 0.74 (less than 2.0 is BAD)

Quick ratio: 0.64 (less than 1.0 is BAD)

Shareholder equity: is negative and keeps getting worse.  This is reflected in the negative book value per share.

 

I give Regal Entertainment Group two thumbs down at $13.96 per share.  A dividend cut is likely.  The company has a 10 year average earning power of $0.76 per share.  And its balance sheet is scarier than most horror films that it plays in its theaters.  The short sellers are justified to bet against Regal.  I would put Regal on your watch list at $9.17, but even then its negative book value and current/quick ratios should give you pause.

 

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