Hasbro, Inc. (HAS, Financial) recently reported earnings results that beat analysts' estimates, causing shares to jump 3%.
However, given the rise of the stock price over recent months, is now a good time for investors to add shares of this global leader in the toy and family leisure industry to their portfolios? Let's examine the company's most recent earnings announcement, dividend history and valuation to see if Hasbro is a buy at the current price.
Recent earnings highlights
Hasbro report fourth-quarter and full year earnings results on Feb. 8, 2021. For the quarter, revenue grew 3.6% year-over-year to $1.72 billion, which was $30 million ahead of Wall Street analysts' estimates. Adjusted net earnings of $175.3 million, or $1.27 per share, compared very favorably to adjusted net earnings of $124 million, or $0.90 per share, in the previous year. Growth for both metrics was more than 41%. Adjusted EPS for the year beat expectations by $0.13.
For full-year 2020, revenue fell 8% to $5.47 billion. Adjusted net earnings of $514.6 million, or $3.74 per share, were below adjusted net earnings of $542.7 million, or $3.94 per share, in the previous year. Both adjusted net earnings and earnings per share were down 5% compared to results for 2019.
The company saw a boost from acquisitions. Hasbro announced in late 2019 that it had agreed to purchased Entertainment One, or eOne, for $4.2 billion. The company closed on its eOne acquisition late in the first quarter of last year. The Canadian-based subsidiary includes film, TV and music properties.
For the quarter, pro forma revenues of the acquisition saw 10% growth to $259.6 million, which represented 15% of sales. Revenues did decline 21% for the year to $956.5 million, 17.5% of the total, which was primarily due to the postponement of live-action production until the third quarter due to Covid-19. eOne completed nearly 60 scripted and unscripted television series and five feature films last year.
Results were solid in most others areas of the company for the quarter and weak for the full year.
Franchise Brands, which includes Monopoly and Nerf, grew 7% for the fourth-quarter, but declined 5% for 2020. Magic: The Gathering and Monopoly had their best year for revenue in the product's history. Combined, these two products' revenue totals grew 27% to $561.2 million for the quarter.
Partner Brands were down low to mid-double digits for both the quarter and year. Strength in Star Wars was more than offset by weakness in Disney's Frozen product line. Star Wars posted revenue growth of 70% from the previous year, and this was without the benefit of a theatrical release for the first time since 2014. The global rollout of the Mandalorian was the principal driving force for this brand.
Hasbro Gaming grew 21% and 15% for the fourth-quarter and full year, respectively. Gaming grew in all regions outside of Latin America. Other classic games, such as Dungeons and Dragons, Jenga and Connect 4, all were highlighted as sources of strength. These products all benefited from consumers staying at home more often.
Emerging Brands declined 7% in the quarter, but this was a de-acceleration from prior quarters. This segment experienced a revenue decrease of 17% for 2020. Preschool brands that were acquired along with eOne added $56.3 million of pro forma revenues in the fourth-quarter and $201 million for the year. There were other bright spots such as increased demand for Furreal Friends and G.I. Joe.
TV/Film/Entertainment grew 20% for the quarter, but decreased 21% for the full year. The restarting of live-action production in Q4 for the eOne business was a significant tailwind to results in the quarter.
By region, revenue for the U.S. and Canada segment grew 16% to $791 million for the fourth-quarter and 4% to $2.6 billion for 2020. International fell 9% to $562 million in Q4 and 14% to $1.6 billion for the year due to weakness in Latin America and China as well as a slight headwind from currency exchange. One international area that turned in a solid performance was Europe, where sales were higher by 4% for the fourth quarter.
The adjusted operating margins expanded 480 basis points to 15.2% and topped consensus estimates of 14.1%. For 2020, adjusted operating margins improved 110 basis points to 15.1%. In both cases, strength in the U.S. and Canada was the primary contributing factor.
The company's balance sheet remains in decent shape. Hasbro ended 2020 with $10.8 billion of total assets, $3.8 billion of current assets and $1.45 billion of cash and cash equivalents. This compares to total liabilities of $7.9 billion and current liabilities of $2.4 billion. Total debt was $5.1 billion, but just $439 million of debt is due within the next year.
Inventory was leaner at $395.6 million compared to $446 million in the prior year. This is due to retailer inventories having been lower during the year. Leadership did point out that production accelerated in Europe as demand picked up in the most recent quarter, showing that Hasbro was able to meet demand where it was during the year. The amount of inventory going forward should offer some insight into the state of retail demand for products. E-commerce remains a positive for the company as this channel topped $1 billion of revenue.
Analysts expect Hasbro to earn $4.31 per share in 2021, which would be a 15% increase from 2020, much higher than the company's 10-year EPS growth rate of 3%.
Dividend and valuation analysis
Hasbro had previously raised its dividend for 16 consecutive years, but has distributed the same amount for seven consecutive quarters. A dividend increase anytime in 2021 will allow the company to maintain its growth streak.
The lack of a dividend increase recently may give income investors pause, so let's consider the company's payout ratios to determine if a dividend cut is a possibility. Hasbro distributed $2.72 of dividends in 2020. Using EPS results for the year, the earnings payout ratio was 73%, which exceeds the 10-year average payout ratio of 52%.
Looking at free cash flow paints a much more positive picture. The company distributed $373 million of dividends last year while generating free cash flow of $851 million for a payout ratio of 44%. This compares favorably to the average free cash flow payout ratio of 57%.
Using the earnings payout ratio shows an elevated payout ratio, but EPS results were largely depressed due to the pandemic (the company had expected EPS of $5.10 at the beginning of last year). Based on the current annualized dividend and expected EPS for the year, Hasbro has a projected payout ratio of 63%, which is much closer to the longer-term average.
Using the free cash flow payout ratio shows that the company's dividend is well-covered. In all likelihood, I think Hasbro's 3% dividend yield is very safe. The lack of a dividend increase is likely more of a prudent move on the part of Hasbro given the nearly unprecedented uncertainty for the business environment last year. The healthy free cash flow payout ratio leads me to believe that the company will offer at least a token dividend increase sometime this year.
In addition to offering a starting yield that is twice that of the average yield of the S&P 500, Hasbro is trading below its GF Value:
Using Friday's closing price of $91.48 and the GF Value of $97.33, Hasbro has a price-to-GF Value ratio of 0.94. This earns the stock a rating of fairly valued from GuruFocus. Reaching the GF Value would offer shareholders of Hasbro a 6.4% return from current levels. Add in the dividend and total returns are in the high single-digit range.
Final thoughts
Hasbro felt the impact of the Covid-19 pandemic on its business throughout portions of 2020, but the company also saw some benefits as well. The acquisition of eOne is already paying off and Hasbro continues to see strength in many of its most important brands.
Total returns for Hasbro as currently priced might not interest growth investors all that much. Income investors looking for safety and a high starting yield which is supported by a low free cash flow payout ratio should find shares appealing. For these investors, I believe Hasbro appears to be a solid option for purchase.
Author disclosure: the author has no position in any stock mentioned in this article.
Read more here:
- Northrop Grumman Continues to Impress
- L3Harris Technologies: One of the Best Values in Aerospace and Defense
- Lockheed Martin: Take Advantage of the Market's Discount
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
