When it comes to dividends, most investors are concerned with the current yield, safety of the dividend and the company’s ability to grow its dividend. These are primarily forward-looking metrics.
Since many of these investors hold these stocks for future income, they are correct to be concerned with these items. One way investors can look backwards is by calculating yield on cost. Yield on cost is the yield of the stock on a historical basis. To calculate yield on cost, you simply divide the current dividend by your cost basis for the position.
Let’s suppose you paid $100 for company XYZ several years ago. At that time, the company was paying $1 per share in dividends. A few years later, XYZ is now worth $200, but is now paying $5 per share in dividends. While the current yield is just 2.5%, your yield on cost from your original purchase is 5%.
As the share price and dividends increase, so does a position’s yield on cost, giving investors a window into how their holdings have performed over the years. Sometimes the yield on cost can surprise you. One company that sports an impressive yield on cost is Hasbro Inc. (HAS, Financial).
Company background
Hasbro is one of the largest makers in the toy and leisure industry. The company markets action figures, board games and other items. Hasbro’s product lines include Transformers, Nerf, Monopoly, PlayDough and My Little Pony. Many of the company’s products are associated with cartoons as well as full-length feature films. This helps drive Hasbro’s sales. The company generated more than $5.2 billion in revenue in 2017 and has a current market cap of $12.5 billion. Slightly more than 40% of sales come from international markets.
Recent earnings results
Hasbro most recently reported earnings results on July 23. The company earned 48 cents per share during the second quarter, which beat the average analysts’ estimate by 18 cents, but declined 9.4% year over year. Revenue declined as well, dropping 7% to $904 million. The liquidation of Toys 'R' Us has been a drag on both earnings and revenue as Hasbro received approximately 9% of its sales from the now-bankrupt company. Still, earnings topped estimates and the revenue decline was actually better than anticipated.
Franchise Brands suffered a decline of 8%, though Magic: The Gathering and Monopoly performed well during the most recent quarter. Hasbro’s line of Marvel and Beyblade products also were a highlight, but weren’t enough to offset declines in other Partner Brands, leading to a 10% drop in revenues for this segment. Gaming was flat year over year and Emerging Brands were down 1%.
While you never want to see declining sales, there were some other bright spots for Hasbro. The company has done a very good job of tying products to movies. Marvel, which seems to produce one blockbuster film after another, continues to be a positive for the company. Nerf remains one of the bestselling toy properties in the U.S. Last year, Hasbro paid less than $10 million to produce a My Little Pony film and ended up making almost $50 million for its efforts. This film also helped drive increases in sales for the line of products. The company also has ample opportunity to sell its products overseas. While international markets showed a decline year over year in the second quarter, Hasbro is just beginning to sell its items in India. With roughly one-third of the country’s 1.3 billion people under the age of 14, Hasbro has a wide target audience for its products.
Prior to the demise of Toys 'R' Us, Hasbro has regularly seen earnings and revenue grow by double digits. Now that it is beginning to lap quarters without Toys 'R' Us included, perhaps the company can return to growth on both metrics.
Even with the negative impact that the closing of Toys 'R' Us has had on the company, shares of Hasbro are up more than 8% year to date, beating the return of the S&P 500. Hasbro reports third-quarter earnings on Oct. 22.
Dividend history and valuation
Hasbro has increased its dividend for the past 15 years. The company has increased its dividend by:
- An average of 9.5% over the past three years.
- An average of 10% over the past five years.
- An average of 14% over the past 10 years.
Hasbro increased its dividend by 10.5% for the payment made this past May. The next dividend increase will likely occur early next spring. Shares of Hasbro currently yield 2.56%, above the S&P 500’s yield of 1.9%.
Dividends are the only way the company returns capital to shareholders. Hasbro has bought back almost $113 million of its own stock over the first six months of 2018, which equates to just under 1% of its market cap.
The midpoint for Hasbro’s earnings per share for the year is $4.79. Based off of the stock’s Oct. 12 closing price of $98.31, Hasbro shares have a price-earnings multiple of 20.5. This is slightly above the stock’s five-year average price-earnings ratio of nearly 18. For comparison purposes, the S&P 500 has a price-earnings ratio of 22.6.
Hasbro’s yield on cost
Sometimes investors become too shortsighted on how their positions are performing. Shareholders of Hasbro might just be concerned with how the closing of Toys 'R' Us is impacting the company’s financial performance. As I said earlier, yield on cost can show you how well a position has done over time. Dividend growth investors tend to be long-term owners of the stocks they purchase. Using expected dividends per share of $2.46 for 2018 and the starting price at the beginning of each year, let’s look at how a long-term investment in Hasbro would have performed.
- 2017: $77.79, yield on cost of 3.2%.
- 2016: $67.36, yield on cost of 3.7%.
- 2015: $54.99, yield on cost of 4.5%.
- 2014: $55.01, yield on cost of 4.5%.
- 2013: $35.90, yield on cost of 6.9%.
- 2012: $31.89, yield on cost of 7.7%.
- 2011: $47.18, yield on cost of 5.2%.
- 2010: $32.06, yield on cost of 7.7%.
- 2009: $29.17, yield on cost of 8.4%.
- 2008: $25.58, yield on cost of 9.6%.
While share price has fluctuated somewhat over the last 10 years, Hasbro’s dividends have increased by double digits. Even if you added Hasbro at the beginning of last year, your yield on cost is more than 3%. You’re looking at 7% yield on cost if you’ve owned the stock for the past five years. Best of all, if you purchased Hasbro at the beginning of 2008 and held on to your shares for the last decade, your yield on cost is nearly 10%. This shows the power of being a long-term shareholder of companies that grow their dividends every year.
Final thoughts
While investors are correct in caring more about a company’s ability to continue paying and raisings its dividend, yield on cost can show can show how well their holdings have performed historically. Hasbro, even with its current struggles surrounding the collapse of Toys 'R' Us, has a very impressive yield on cost over both the short and long term. This is possible because the company has rewarded shareholders with a steady stream of dividend increases. Having companies like this in your portfolio, even when they have short-term struggles, can go a long way in retirement.
Disclosure: I am not long any of the stocks mentioned in this article.
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