Mattel Inc. (MAT) ran into a bit of trouble last year during Christmas, when its branded toys such as Barbie, American Girl and Fisher-Price collapsed by 12%, 4% and 11%, respectively. This caused the total revenue to drop from $6.5 billion in 2013 to $6.0 billion in 2014. Its net income fell even more, from $903 million in 2013 to $498 million in 2014. As can be expected, the company’s shares took a similar beating.
This precipitous drop has pushed Mattel’s dividend yield up near historic highs. At 5.5%, the yield is seemingly very attractive.
When the dividend previously hit 6%, the company was able to get away with sustaining the dividend, growing EPS fast enough to cover the high payout.
Mattel has since fired its CEO, replacing him with their former Chairman. Almost immediately, the new CEO initiated an aggressive turnaround plan for the company. Will this be enough to return EPS to above dividend payout levels, rewarding investors with a 5.5% dividend in the interim?
The Business
Mattel owns some of the most recognizable toy brands in the world. In 2014, 60% of sales came from core brands such as Barbie, Hot Wheels, Fisher-Price, and American Girl. The company has a global reach and strong, long-term licensing relationship with some of the largest entertainment brands in the world.
The turnaround plan involves both cutting cost and increasing sales. On the cost-cutting side, Mattel hired a former executive from Amazon to refocus its supply chain and squeeze profitability out of every value-add level. On the sales side, Mattel is partnering with the likes of YouTube (GOOG) and Netflix (NFLX) to create cutting-edge content. This will allow the company to quickly introduce high-tech versions of their toys.
For example, it is in partnership with ToyTalk and Google to push out cloud-based toys that allow children to talk and interact with their toys. This is currently in the initial stages and is limited to Barbie, but Mattel has plans to expand it to other brands.
Growth Opportunities Remain
The company is ready to point out that overall growth of the toy industry is strong. Globally, Euromonitor predicts that the next few years should be some of the healthiest the industry has seen in almost a decade, growing at an annual 7% rate.
Thus far, Mattel’s issue has been reorganizing its product development to take advantage of shifting trends in the toy industry. With one of the world’s strongest brand portfolios and a focused restructuring effort to capitalize on the industry’s growth, it seems more likely than not that Mattel will succeed. Indeed, analysts are expecting over 4% annual EPS growth over the next five years. These estimates are even after a heavy downward revision in next years EPS projections.
Valuation
Should the restructuring efforts take hold, it doesn’t appear as if a dividend cut is imminent. Even at next years depressed EPS estimate, it should cover the total dividend payout. However, in the current environment, the only reason the dividend has been sustained is due to increased borrowing. Long-term debt increased from $1.6 billion in 2013 to $2.1 billion in 2014, and total liabilities rose from $3.2 billion to $3.8 billion.
On a multiple basis, Mattel looks to be cheaper than most of its peers, including Jakks Pacific (JAKK) and Hasbro (HAS).
Still, any investment in Mattel shares should be contingent on the level of confidence in their restructuring efforts. Fortunately, Goldman Sachs recently released a report saying that new initiatives at the toy company are on target. Assuming this stabilizes the business and the company can leverage its strong brands across a growing industry, shares could be compelling.
For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
