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Hasbro’s Average Yield Is Hiding Its Dividend Growth Potential

Published December 21st, 2016 by Bob Ciura

There are two companies that dominate the U.S. toy industry: Mattel (MAT) and Hasbro (HAS).

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 S&P 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+ 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:

Hasbro’s strategy is to maximize the potential of its brands across several key categories.

HAS Brands

Source: Q3 Earnings Presentation, page 3

Hasbro focuses on its seven major brands, which together represent 52% of annual revenue. These are:

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 the international markets. Most of Hasbro’s revenue comes from the U.S., but it does have a growing presence overseas.

HAS Currency

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 under-developed economies .

Hasbro will also realize earnings-per-share growth through cost cuts and share repurchases.

First, Hasbro’s margins have increased over the past several years.  Rising margins are due to various cost-cutting initiatives.

HAS Margins

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.

HAS Share Buyback

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.

HAS Dividend

Source: Q3 Earnings Presentation, page 20

Hasbro’s double-digit dividend growth makes it such an attractive stock for income.

Competitive Advantages & 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:

In addition, Hasbro’s advertising expense is as follows:

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 respective 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:

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 & Expected Total Returns

Hasbro stock trades for a price-to-earnings ratio of 23. It is slightly cheaper than the S&P 500 Index, which has an average price-to-earnings 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 price-to-earnings 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:

Going forward, I expect Hasbro stock to return approximately 10.5%-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.

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