Published December 7th, 2016
The U.S. toy industry is dominated by two companies, Mattel (MAT) and its fierce rival Hasbro (HAS). Both companies have $10 billion market caps.
At first glance, Mattel seems like the more attractive income stock. It has a 5% dividend yield, while Hasbro’s dividend yield is half that.
However, even though Mattel offers a much higher dividend yield, Hasbro provides much stronger dividend growth. In fact, Hasbro is a Dividend Achiever, while Mattel is not.
Dividend Achievers are stocks with 10+ consecutive years of dividend increases. You can see the entire list of all 273 Dividend Achievers here.
For comparison, Mattel has held its dividend payments steady since February of 2014. Mattel is struggling with declining sales across some of its most important brands.
That makes its dividend riskier than meets the eye.
Mattel has 31,000 employees and sells its products in more than 150 nations across the world. It has several key brands, which include Barbie, Fisher-Price, American Girl, Hot Wheels, Monster High, and Thomas & Friends.
The business segments are organized as follows:
- Mattel Girls & Boys Brands (54% of sales)
- Fisher-Price Brands (33% of sales)
- American Girl Brands (7% of sales)
- Construction and Arts & Crafts Brands (6% of sales)
The Girls & Boys Brands is Mattel’s most important segment. That is because it includes Mattel’s flagship Barbie product line, among others.
Barbie itself accounts for 30% of sales in the Girls & Boys Brands category. This is a big problem, as sales of Barbie are declining.
In fact, Barbie sales fell 6% in 2013, 16% in 2014, and 10% in 2015. To be sure, foreign exchange impacts have contributed to these declines. Mattel generates 41% of its annual sales from outside the U.S.
Because of its international exposure, the strong U.S. dollar has eroded sales generated overseas. But even when excluding currency impacts, Barbie sales are still declining.
Younger generations of consumers simply aren’t demanding Barbie dolls like previous generations did. And, Mattel has compounded its problems by missing the growth in digital and online games, and the broader move away from physical dolls.
Management insists it is on track for a successful turnaround. However, business conditions have not improved over the course of 2016.
For example, through the first nine months of 2016, total sales declined 2% versus the same period in 2015.
The lack of growth underscores the uncertainty regarding Mattel’s turnaround strategy. The company does not seem to have many firm growth catalysts at its disposal.
Going forward, Mattel has placed several core brands in focus for 2017 and beyond.
Source: 2016 Analyst Day presentation, page 11
Broadly speaking, Mattel has stated its intention to re-establish leadership in these categories. To that end, it has come out with several new products designed to restore its brand image.
Mattel emphasizes its product innovation. One example is new Barbie toys, such as a ‘smart’ home and a drone for Barbie.
Source: 2016 Analyst Day presentation, page 9
This seems to have potential. However, the results have not materialized yet, as sales are still in decline.
To help stabilize earnings-per-share, Mattel has launched a company-wide cost cutting initiative called Funding Our Future.
Source: Third Quarter Earnings Presentation, page 11
The company expects to realize $140 million-$150 million in cost savings across SG&A and advertising expense.
Cost cuts will help stem the decline in earnings-per-share, although it is not a catalyst for revenue growth.
To grow revenue again, Mattel is hoping for new product development and acquisitions to replace the lost Barbie sales. For example, Mattel acquired Canada-based construction toy company Mega Brands in 2014 for $460 million.
This was a good deal for Mattel. It gave the company much-needed entry into a growing category. Construction toys are incredibly popular. In fact, privately-held Lego is one of the biggest toy companies in the world.
Mattel’s recently-formed Construction and Arts & Crafts segment generated $352 million of sales last year, up 12% from 2014.
Unfortunately, its broader problems with Barbie and other product categories is outweighing the impact of the Mega Brands acquisition.
Mattel management forecasts currency-neutral sales to be flat in 2016. This is not exactly the kind of turnaround that investors are hoping for.
Mattel’s main competitive advantage is its brand equity. It is critical for a toy company to maintain a positive image with its consumers.
The company does this with significant advertising. Mattel’s advertising expense over the past three years is as follows:
- 2013 advertising expense of $750 million
- 2014 advertising expense of $733 million
- 2015 advertising expense of $717 million
To help boost profitability, Mattel is reducing its annual advertising expense toward the lower end of its stated guidance, between 11%-13% of revenue.
Source: 2016 Analyst Day presentation, page 11
However, it is difficult to see how reducing advertising expense will have a positive long-term impact. With less advertising, it will be more difficult for Mattel to connect with consumers.
This is especially true when Mattel comes out with the new products that are crucial to its turnaround.
Mattel’s turnaround efforts could be classified as a pursuit of stabilization, rather than a firm plan to restore growth.
The good news is that if Mattel can at least stabilize its sales performance, it should remain profitable enough to support its current dividend.
The bad news is that it will need to return to growth, if it is to grow its dividend moving forward.
So, the trade-off for investors is that while Mattel offers a tantalizing 5% dividend yield, that is probably all investors will get. Earnings-per-share are not likely to grow in 2016 and perhaps not next year either, as the company will have to spend more on new product development and/or acquisitions.
Mattel’s 5% dividend yield is possibly attractive for investors looking for high levels of current income. After all, interest rates remain low, and the average dividend yield in the S&P 500 is just 2%.
That being said, Mattel is not an attractive choice for dividend growth investors.