(Published Feb. 7 by Bob Ciura)
Shares of toymaker Hasbro (HAS, Financial) jumped 14% on Feb. 6 after the company reported quarterly earnings that crushed analyst expectations. Hasbro stock rose above $94 per share after earnings, marking an all-time high.
Not only did Hasbro reward shareholders with a higher share price, but the company also raised its quarterly dividend by 12%.
Hasbro is a Dividend Achiever, a group of 272 stocks with 10-plus years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
Hasbro stock has something to offer nearly all investors. It is a growth company with an above-average dividend yield and is a high dividend growth stock as well.
Financial results overview
Hasbro is a global toy manufacturer. The company operates the following segments:
- U.S. and Canada (51% of revenue).
- International (44% of revenue).
- Entertainment and Licensing (5% of revenue).
For the fourth quarter, Hasbro reported revenue of $1.63 billion. Analyst expectations called for $1.5 billion. Meanwhile, earnings per share came to $1.64, which handily exceeded expectations of $1.27.
On a year-over-year basis, Hasbro’s revenue and earnings per share rose 11% and 10% from the fourth quarter of 2015.
Source: 4Q Earnings Presentation, page 6
Hasbro also realized growth across product categories. Franchise brands grew 3% for the quarter, due to growth in the Nerf, Transformers and Monopoly brands.
Revenue from games rose 11% in the fourth quarter due to growth in the Pie Face, Duel Masters and Speak-Out games. Lastly, revenue from Hasbro’s partner brands increased 16%, thanks largely to growth of Disney (DIS, Financial) Princess and Frozen toys.
Hasbro’s fourth-quarter performance capped off a phenomenal year for the company.
All three operating segments posted excellent growth in 2016. U.S. and Canada, International and Entertainment and Licensing revenue increased 15%, 11% and 8%.
In all, Hasbro generated record revenue and earnings in 2016. The company surpassed $5 billion in annual revenue for the first time in its history.
Hasbro generated $620 million of free cash flow in 2016, up 51% from $410 million in 2015.
Growth prospects
The most appealing long-term growth potential for Hasbro is expansion into new geographic markets. Hasbro’s international business is firing on all cylinders.
Source: 4Q Earnings Presentation, page 9
In particular, Hasbro is growing in several premiere emerging markets in Asia-Pacific and Latin America.
Overall, emerging-market revenue rose 12% in 2016, led by China, Russia and Brazil.
Not only that, but Hasbro’s operations in Europe are performing well despite the weak economic growth and heightened uncertainty facing the European economy.
Hasbro’s industry-leading growth is thanks largely to its popular brand portfolio. Strong brands have allowed Hasbro to capture market share against its main competitors.
Last year, Hasbro gained market share in most of its core geographic markets, including the U.S., U.K., Brazil and Russia.
Hasbro keeps its brand image high because of significant advertising. The company’s advertising expense over the past three years is as follows:
- 2014 advertising expense of $420 million.
- 2015 advertising expense of $409 million.
- 2016 advertising expense of $469 million.
Another catalyst for continued earnings growth is cost cuts. Hasbro has effectively managed its cost structure by expanding operating profit margin for three years in a row.
Even though sales rose at a double-digit pace last year, the company ended 2016 with roughly flat inventory levels from the previous year-end.
Lastly, Hasbro’s Entertainment and Licensing business is a growth catalyst. One specific area that is attractive is mobile gaming. The company made a major push in mobile gaming through its investment in Backflip Studios.
New launches from Backflip Studios, including Transformers: Earth Wars and DragonVale World, reported growth last year.
Hasbro does not yet break out performance of mobile gaming separately, as mobile is still a fledgling operation. However, will be a major contributor to Hasbro’s Entertainment and Licensing segment, as will Hasbro’s new story-driven lifestyle brand, Hanazuki.
Hasbro launched this brand in 2016 on YouTube, with animated stream content produced by Hasbro Studios. In the first three weeks alone, it was viewed over 49 million times.
As a result, Entertainment and Licensing is likely to be an increasingly significant part of Hasbro’s business moving forward.
Dividend analysis
Hasbro is a shareholder-friendly company. In 2016, it returned $400 million to shareholders. The cash returns consisted of $249 million in dividends and $151 million in share repurchases.
The recent 12% dividend is the company’s 13th dividend raise in the past 14 years.
Source: 4Q Earnings Presentation, page 23
In the past decade, Hasbro has increased its dividend by 14% each year on average. It paid $1.7 billion of dividends in the past 10 years.
Going forward, Hasbro’s annualized dividend will rise to $2.28 per share. This represents an attractive 2.4% dividend yield.
Hasbro’s yield exceeds the Standard & Poor's 500 Index average yield, which is 2%.
Future dividend growth is likely, not just because of the company’s earnings growth but also its modest payout ratio. Hasbro’s forward annual dividend payout represents just 52% of its 2016 diluted earnings per share.
This leaves the company with more than enough flexibility to continue raising the dividend, even if earnings growth slows somewhat in the years ahead.
After investing in the business and paying dividends, repurchasing stock is a capital allocation priority for Hasbro.
Source: 4Q Earnings Presentation, page 24
Importantly, Hasbro is in sound financial position. The company ended 2016 with $1.3 billion in cash and marketable securities, which exceeds the $1.2 billion the company carries in long-term debt.
Final thoughts
Hasbro competes directly with Mattel (MAT, Financial) in the toy industry. Based on their respective financial performances in 2016, it’s clear Hasbro is winning the war.
It has taken market share against its main rival. Perhaps the biggest example of this was in 2014, when Hasbro was awarded the lucrative Disney contract.
This is a big reason why Hasbro has significantly outperformed Mattel over the past few years and why Hasbro stands as the better dividend stock of the two toy giants.
Disclosure: I am not long any of the stocks mentioned in this article.
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