It's not often a company handily beats analysts' earnings expectations, then turns around and slashes its dividend, but AMC Entertainment (AMC +0.00%) did just that. The movie theater operator cut its quarterly payout 85% to $0.03 per share even though fourth-quarter revenue rose 2.4% year over year, and adjusted earnings of $0.35 per share trounced Wall Street's forecast of just $0.10 per share.
While AMC said it actually could afford to pay the dividend if it wanted to, but the company "believes that given recent trading ranges for AMC shares, it is wiser to return cash to shareholders in the form of share repurchases."
The theater operator's stock has fallen around 60% over the past year, apparently making it too cheap for management to pass up.
Image source: Getty Images.
Hollywood takes a breather
Although theater attendance fell almost 5% to 1.24 billion last year, the second-lowest number since 2000, and box office receipts fell to $11.3 billion, AMC Entertainment CEO and president Adam Aron doesn't agree Hollywood is to blame.
He noted during the earnings call that 2019 was the biggest global box office year on record, so even if fourth-quarter box office was below the year-ago period, the $2.9 billion it generated was "right on par for the average fourth quarter over the past five years."
The theater operator was also helped by the launch of its Stubs A-List movie ticket subscription service, which surpassed 900,000 subscribers in less than a year. When the service debuted, AMC said it hoped to reach half a million subscribers after 12 months.
Originally popularized by MoviePass, AMC came up with a competing program that lets Stubs A-List subscribers see as many as three movies a week for $20 to $24 per month depending on where they live. While it could be costly if members actually saw the full slate of movies allowed, AMC believes the program is profitable. In contrast, MoviePass declared bankruptcy in January and will liquidate its assets.
Cash on the line
AMC said it is doing well globally and has no exposure to China, so the COVID-19 coronavirus outbreak there won't hurt it, though it did close 22 of its 47 theaters in Italy.
Yet with its stock price depressed at less than $5 per share as of this writing, management believes the best investment it can make right now is its own stock. The theater operator initiated a $200 million share-repurchase program to buy back stock over three years.
Executives are also putting their money on the line. All senior officers except those retiring have agreed to cut their cash salaries and bonuses by 15% for three years in exchange for stock grants that will only vest if AMC's stock at least doubles during that time period.
Split over six tranches, each succeeding grant requires AMC stock to increase at ever escalating rates, topping out at increases of 440%, or the equivalent of $32 per share. Shares initially soared on the news but have since pulled back sharply along with the broad market due to coronavirus fears.
Going all-in on growth
It's a big bet the theater operator can overcome seemingly sluggish trends in Hollywood and that the market will correctly value its stock.
While slashing the dividend is often a step companies are loath to take, because it typically signals financial trouble, that's not the situation with AMC Entertainment. Yet giving up the safety of the dividend payment for the promise of much larger capital appreciation down the road is a risky move to make, one that requires a big leap of faith for investors.
