(Published Dec. 21 by Bob Ciura)
There are two companies that dominate the U.S. toy industry: Mattel (MAT, Financial) and Hasbro (HAS, Financial).
Both companies pay dividends to shareholders. Mattel has a 5% dividend yield. Mattel may appeal more to investors looking for high yields, but its higher yield comes with significant risks.
On the other hand, Hasbro has a smaller dividend yield of 2.5%. This isn’t too exciting of a dividend yield; the Standard & Poor's 500 Index on average yields about 2%.
But the advantage for Hasbro is that it is a high dividend growth stock.
Hasbro is a Dividend Achiever. To be a Dividend Achiever, a stock must increase its dividend for 10-plus consecutive years. This is no small feat.
You can see the entire list of all 273 Dividend Achievers here.
This article will discuss why Hasbro might be a good stock to put on your holiday shopping list.
Business overview
Hasbro has a long and rich history. Interestingly, its origins had little to do with toys.
The company was founded in 1923 and was known as Hassenfeld Brothers. The company was named after its founders Henry, Hillel and Herman Hassenfeld.
At first, the company sold textile remnants and soon expanded into pencil boxes and school supplies.
It wouldn’t make its first toy until the 1940s. The first toys it manufactured were doctor and nurse kits. In 1952, the company unveiled Mr. Potato Head, which is still popular today.
Today Hasbro generates more than $4 billion in annual revenue. The company is organized into three main operating segments:
- U.S. and Canada (56% of sales).
- International (41% of sales).
- Entertainment and Licensing (3% of sales).
Hasbro’s strategy is to maximize the potential of its brands across several key categories.
Source: Q3 Earnings Presentation, page 3
Hasbro focuses on its seven major brands, which together represent 52% of annual revenue. These are:
- Littlest Pet Shop.
- Magic: The Gathering.
- Monopoly.
- My Little Pony.
- Nerf.
- Play-Doh.
- Transformers.
Growth prospects
Hasbro has plenty of growth opportunities ahead of it, in the U.S. and abroad. Last quarter, total revenue increased 14%. All three operating segments reported growth with U.S. and Canada segment revenue up 16% year over year.
This resulted in record quarterly revenue and earnings for the company. Going forward, the company should see continued growth.
One area of future growth for Hasbro is international markets. Most of Hasbro’s revenue comes from the U.S., but it does have a growing presence overseas.
Source: Q3 Earnings Presentation, page 11
In 2015, emerging market revenue increased 15% excluding the impact of foreign exchange. This was a higher growth rate than Hasbro saw in the U.S. Higher growth is why the company is targeting underdeveloped economies .
Hasbro will also realize earnings-per-share growth through cost cuts and share repurchases.
Hasbro’s margins have increased over the past several years. Rising margins are due to various cost-cutting initiatives.
Source: Jefferies Consumer Conference presentation, page 4
With its high profitability, it can use a significant amount of cash to buy back its own shares.
Source: Q3 Earnings Presentation, page 21
Hasbro repurchased more than $3 billion of its own stock over the past decade. By reducing the number of shares outstanding, each remaining share receives a greater amount of earnings.
This year, the company’s earnings per share increased 29% over the first three quarters. With such strong earnings growth, the company can afford to increase its dividend at high rates.
Source: Q3 Earnings Presentation, page 20
Hasbro’s double-digit dividend growth makes it such an attractive stock for income.
Competitive advantages and recession performance
As a consumer products company, Hasbro’s main competitive advantage lies in its brand strength. The company invests significantly in its key brands through R&D and advertising.
Hasbro’s product development costs over the past three years are as follows:
- 2013 product development expense of $208 million.
- 2014 product development expense of $223 million.
- 2015 product development expense of $243 million.
In addition, Hasbro’s advertising expense is as follows:
- 2013 advertising expense of $398 million.
- 2014 advertising expense of $420 million.
- 2015 advertising expense of $409 million.
Hasbro’s competitive edge is enabled by its size. Along with Mattel, Hasbro has an approximately $10 billion market cap. They are two of the largest companies in their industry.
Hasbro has the financial strength to spend significantly on advertising and R&D. This spending helps it maintain its competitive advantages.
A strong brand helps the company remain profitable, even during deep recessions.
Hasbro’s earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $2.05.
- 2008 earnings per share of $2.00 (2.4% decrease).
- 2009 earnings per share of $2.48 (24% increase).
- 2010 earnings per share of $2.74 (10% increase).
As you can see, Hasbro suffered only a slight dip in earnings per share during the financial crisis. Its earnings quickly recovered in 2009 and were back to a new high in 2010.
Valuation and expected total returns
Hasbro stock trades for a price-earnings (P/E) ratio of 23. It is slightly cheaper than the S&P 500 Index, which has an average P/E ratio of 26.
The stock is slightly cheaper than the broader large-cap index, but it is more expensive than it has been in years. Since 2000, Hasbro stock held an average P/E ratio of 14.5.
Consequently, investors should view Hasbro stock as fairly valued and perhaps slightly overvalued. With that in mind, it could be wise to wait until a minor correction before buying shares.
Still investors can earn good returns going forward, based on earnings-per-share growth and dividends.
Analysts on average expect Hasbro’s earnings per share to increase 20% in 2016 and 9.5% in 2017. Based on these projections, it is reasonable to model 10% earnings-per-share growth over the long term.
As a result, future shareholder returns could be as follows:
- 5% to 7% revenue growth.
- 1% margin expansion.
- 2% share repurchases.
- 2.5% dividend yield.
Going forward, I expect Hasbro stock to return approximately 10.5% to 12.5% per year.
Final thoughts
Hasbro is seeing excellent growth in revenue and earnings per share. The company is highly profitable and returns lots of cash to investors through share repurchases and dividends.
The company should see continued growth, particularly in new geographic markets, thanks to its popular toys and games.
Hasbro is a Dividend Achiever giving the gift of dividends. The company is an example of a lower-yielding stock that can fit well into a dividend growth portfolio.
Disclosure: I am not long any of the stocks mentioned in this article.
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