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March 05, 2007

Regal Declares $2 Per Share Special Dividend

Regal Entertainment (RGC) announced that it would be using a portion of the proceeds it received from the IPO of National Cinemedia (NCMI) to pay a special dividend of $2.00 to RGC shareholders. This action continues a pattern of special dividends paid by RGC which along with an annual dividend of $1.20 and modest appreciation have allowed RGC shareholders to earn a compound annual total return of 15% on their shares since the company came public in 2004.

I think the newly announced special dividend will kick off another year of 15% total returns and strongly recommend investors be long RGC. The shares are especially valuable in the current uncertain market environment as the rally in the bond market has made the 6% current yield from the annual dividend even more valuable. Yesterday on Real Money, Jim Cramer was talking about stepping up to stocks with a 4% current yield. I emailed him all of my writing on RGC and told him he could find 6% here!

Most people write off RGC because they believe the movie theatre is dying a slow death due to alternative forms of digital entertainment. I believe those concerns are over hyped and point to last year's rebound in the box office to a gain of over 3% as evidence. However, even if you believe theatres are dying, you can’t overlook the fact that they are cash cows with high free cash flows.....

This sort of financial profile can be profitable for investors if management adopts the right capital structure and returns cash to shareholders. Under the leadership of its largest shareholder, the Anschutz Corporation, RGC has adopted this exact approach shareholders are being rewarded even as EBITDA barely grows over multiyear periods.

Over the last several years, RGC shares have traded at 8-9 times EBITDA. If those levels are sustained this year, the total return potential is between 9% and 25%. I believe that most of this return will occur between now and mid-May as investors are likely to bid up RGC shares as we approach what is shaping up to be the best month in the history of the theatre business when the third films in the Shrek, Spiderman, and Pirates of the Caribbean franchises are released. These films and decent 1Q07 box office will show investors that overall box office is likely to rise again in 2007 despite the doomsday scenarios. This is good for theatre industry valuations. Even better for RGC, analyst estimates and company guidance for 2007 are conservative indicating just 1-2% EBITDA growth. Put it all together and I think my target valuation for year end 2007 is realistic as is the hopes for an acceleration of a good chunk of the return to the next three months.

On the basis of this analysis and a pullback in RGC shares with the stock market decline, I added more RGC shares to accounts where the position size was too small. This only covered about 1/3rd of the Northlake accounts as most clients already had a full position in RGC.

Posted by Steve Birenberg at March 5, 2007 09:18 PM in RGC