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Nathan Parsh
Nathan Parsh
Articles (155) 

After a Double-Digit Decline, Hasbro Is Now Fairly Valued

The stock has suffered a deep decline as the toy company struggles with the Covid-19 pandemic. Still, shares appear to be fairly valued

October 14, 2020

The Covid-19 pandemic resulted in the shuttering of brick-and-mortar stores in much of the world for long periods of time. This negatively impacted companies in the travel and leisure industry.

Hasbro Inc. (HAS) was no different, as sales fell more than 12% and earnings per share decreased 97% in the most recent quarter. Lower consumer demand due to less discretionary spending, supply chain issues and retailer closures all contributed to the year-over-year decline.

There were some bright spots, namely gaming sales improving by double digits and e-commerce becoming more of a focal point.

With results like this, it isn't surprising that shares of Hasbro have fallen nearly 17% year to date. Still, the stock offers a higher-than-normal dividend yield and appear to be fairly valued even with the challenges that it faces. And with many retailers now operating on a more regular basis, demand for products should normalize somewhat. This means that the company has likely seen its lowest point for sales and earnings per share and can only go up from here.

We will use several rating tools provided by GuruFocus to determine if the decline in share price represents an opportunity for long-term investors to purchase shares of Hasbro.

Company background and historical performance

Hasbro is a worldwide leader in the toy and family leisure time industry. The company's products include Transformers, G.I. Joe, Play-Doh, Milton Bradley, Nerf and Playskool. IT recently purchased an independent studio that specializes in producing family content to augment its own motion picture business. The generated $4.7 billion of sales in 2019, with approximately half coming from international markets. Hasbro has a current market capitalization of $12 billion.

The company's revenue has ebbed and flowed over the long term. Revenue collapsed during the dotcom bubble earlier this century and it took quite a few years to reach a new high. The company performed much better during the Great Recession (more on that later).

Hasbro's revenue increased 1.7% annually from 2010 to 2019. Revenue has traded off years of growth with years of slight decreases several times in the last decade, the most pronounced of which was a 12% dip from 2017 to 2018.

On the bright side, earnings per share has compounded at a 4.1% clip during this same period of time. The share count has remained quite consistent over the years. The growth on the bottom line has come with an improved net profit margin, which has increased from 9.9% in 2010 to 11.1% last year. This has allowed Hasbro to have more consistent growth for earnings than revenue.

This strength is reflected in the company's profitability rank.

The GuruFocus system awards Hasbro an 8 out of 10 for profitability. The company's operating margin is higher than 82% of peers in the travel and leisure industry. This industry thrives when the economy is doing well, but suffers when consumers pull back on spending. Hasbro also scores well on return on equity, besting almost 91% of the competition in the industry.

Where Hasbro comes up short is its three-year revenue growth and earnings per share growth rate, both of which are near the bottom of the company's own historical performance. Part of this can be explained by the bankruptcy of certain retailers, like Toys 'R' Us, as well as the impact of Covid-19 on discretionary spending.

Hasbro still grades out quite well in profitability considering the headwinds just discussed. If the company can perform well under a challenged environment, it should operate at an even higher rate under more normalized conditions. Companies that can manage difficult times well are just the type I want to own in my portfolio.

Dividend analysis

Hasbro has raised its dividend for the past 16 years. According to The Dividend Investing Resource Center, which maintains a database of companies that have at least five consecutive years of dividend growth, Hasbro dividend has increased by an average of:

  • 10.3% over the past three years.
  • 9.6% over the past five years.
  • 12.8% over the past 10 years

Dividend growth has been close to or above the double-digit level over the listed periods of time, a solid growth rate for a company that is sensitive to consumer spending habits.

Hasbro has not raised its dividend since the May 15, 2019 distribution. Including the upcoming Nov.16 payment, the company's dividend has remained the same for seven consecutive quarters. A raise any time in 2021 will allow the company to maintain its dividend growth streak.

Hasbro's current yield outranks nearly two-thirds of companies in its industry, though the dividend yield comes up a little short compared to the stock's own history. The company's dividend growth rate also outranks peers even with the dividend pause that has occurred in 2020.

Hasbro has an average dividend yield of 2.9% since 2010 according to Value Line, meaning that the current yield is slightly above average for the stock. The average yield drops to 2.5% when looking at just the last five years. For additional context, Hasbro hasn't averaged an over 3% yield for an entire year since 2014.

Looking at the chart above, you can see that earnings per share were not able enough to cover Hasbro's dividends per share in the early part of this century. Since approximately 2003 through 2018 or so, earnings per share were comfortably above the dividend. Free cash flow has more than covered dividends distributed over the last 20 years. This time period covers two recessions, giving me some confidence that the dividend will likely be able to survive the next recession.

Hasbro dividend payments have totaled $2.72 over the last four quarters, while the company's earnings per share have totaled $3.67 for an earnings payout ratio of 74%. This compares unfavorably to the 10-year average payout ratio of 52%. Keep in mind that the last two quarters have seen significant decreases in earnings per share due mostly to the impact of the Covid-19 pandemic.

Hasbro has distributed $358 million of dividends to shareholders over the last four quarters while generating free cash flow of $436 million. This results in a free cash flow payout ratio of 82%. Again, this is abnormally high payout ratio due to the ongoing pandemic. The company had an average free cash flow payout ratio of 52% from 2016 through 2019. It should be noted that free cash flow last year was down about $100 million from 2016 levels, so there have been declines unrelated to Covid-19.

Looking at the historical payout ratios, it looks like Hasbro's dividend is well covered under a normal operating environment. If, however, the pandemic were to continue to be a major headwind, then high rates of dividend growth could be a thing of the past. That said, the company's performance in the most recent recession provides some hope that dividend growth will continue.

Recession performance

Listed below are Hasbro's earnings per share results for the years before, during and after the last recession:

  • 2006 EPS: $1.29
  • 2007 EPS: $2.05 (59% increase)
  • 2008 EPS: $2.00 (2.5% decrease)
  • 2009 EPS: $2.48 (24% increase)
  • 2010 EPS: $2.74 (10.5% increase)
  • 2011 EPS: $2.78 (1.5% increase)

Hasbro suffered a small dip in earnings per share in 2008, but quickly returned to growth the very next year and made a new high at the same time. The company's earnings per share improved 21% from 2007 to 2009. Adjusting for the change in share count over this period of time, net income grew 14%. This is quite the accomplishment given that Hasbro's products aren't considered staples in the same way that a packaged food or health care company would be. Even in a difficult economic environment, consumers still sought out Hasbro's products.

This allowed the company to continue raising its dividend. Listed below are the company's dividends paid before, during and after the last recession.

  • 2006 dividends: 45 cents
  • 2007 dividends: 64 cents (42% increase)
  • 2008 dividends: 76 cents (19% increase)
  • 2009 dividends: 80 cents (5.3% increase)
  • 2010 dividends: 95 cents (19% increase)
  • 2011 dividends: $1.15 (21% increase)

It is true that dividend growth slowed from 2007 through 2009, but Hasbro's growth rates quickly rebounded to the double-digit variety in the years directly after the recession was over.

Debt

The GuruFocus system doesn't think much Hasbro's current financial strength.

The company receives a 4 out of 10 in this area, mostly due to current numbers compared to Hasbro's historical average. For example, the cash-to-debt ratio is lower than 69% of competitors, but is very close to the low end of the range that Hasbro has had over the last decade.

Part of this is explained by the company having less cash on its balance sheet and more debt. For example, Hasbro ended the most recent quarter with $966 million of cash and cash equivalents, whereas the company had $4.6 billion of cash and cash equivalents at the end of 2019. Total debt jumped from $1.7 billion at the end of 2018 to $5.2 billion at the end of the second quarter.

Fortunately, debt due within the next year is just $427 million, so Hasbro has enough cash to cover this maturity.

With an increase in the amount of debt comes higher interest expense payments. Interest expense has totaled $162 million over the last four quarters, which gives Hasbro a weighted average interest rate of 3.1%. This isn't an extremely high interest rate, which should allow the company to manage its debt obligations without impacting its ability to continue paying dividends to shareholders.

Valuation

Hasbro's stock ended Tuesday's trading session at $86.89. According to Yahoo Finance, analysts expect earnings of $3.29 per share for 2020. This gives the stock a forward price-earnings ratio of 26.4. This is considerably higher than the price-earnings ratio of 17.3 that the stock has averaged since 2010. It is even above the five-year average price-earnings ratio of 20.

Hasbro actually trades slightly below its intrinsic value according to the GF Value Line chart.

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If you're not familiar with GF Value, it represents the current intrinsic value of a stock based on a variety of factors, including price-earnings ratio, price-to-free cash flow, the company's past returns and future estimates of business performance.

As of yesterday, the GF Value is $91.20. This gives the stock a price-GF Value of 0.95 and earns Hasbro a rating of fairly valued.

Final thoughts

Hasbro's recent results have suffered largely due to forces outside of its control. This has hampered the company's ability to grow. Still, the company receives a favorable profitability ranking due to its performance relative to its competition. The company has also managed to raise its profit margins, allowing for EPS growth to top revenue growth.

The company's dividend has been paused for several quarters now, but survived the Great Recession and had solid growth rates prior to this year. Higher-than-usual payout ratios likely mean that dividend growth will be muted in the short term.

The company carries a lot of debt, but its near-term obligations are covered and the weighted average interest rate is manageable.

Even with the headwinds that it faces, the GF Value chart shows shares to be fairly valued. Not bad for a company that has felt a direct impact from the Covid-19 pandemic.

Hasbro looks to be one of the stronger companies in the travel and leisure industry, no doubt because of its key brands.

Investors looking for an entry point into Hasbro might want to wait for a pullback for a larger margin of safety, but the company remains one of my favorite names in its industry on account of its brands and recession performance.

Disclosure: The author has no position in any stocks mentioned in this article.

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About the author:

Nathan Parsh
I am originally from Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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