Why Hasbro's Stock Is Worth Owning

The next selection for the newly launched Inflation-Protected Income Growth Portfolio comes straight from Santa's Workshop just in time for Christmas: toymaker Hasbro (HAS +0.00%). Perhaps best known for its movie tie-ins with the Star Wars and Marvel franchises, Hasbro's total portfolio also includes classics like Nerf, Play-Doh, and Twister as well as the Parker Brothers games like Monopoly. 

Hasbro's dividend history has had a few rough spots, with a cut in 2001 that didn't get restored until 2004. Both prior to that cut and since the growth was restored, however, Hasbro has regularly raised its payments. That 2001 dividend cut was driven by an overreliance on hot toys that then grew cold, which is an ongoing risk in the industry.

Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

• Payment: The company's annual dividend currently sits at $1.44 a share, a yield of about 4% based on Friday's closing price. It did pull forward its February 2013 dividend to December 2012, one of a number of companies that did so in order to take advantage of a tax break that's likely to expire at the end of December. The iPIG portfolio is willing to give up that dividend because Hasbro's stock price looks like a decent bargain, but it will be watching closely for signs of strength when the company announces its anticipated May dividend.
• Growth history: The company has paid higher dividends every year since restoring its growth in 2004. Because of the pull-forward of the February 2013 dividend to December 2012, that streak may be in jeopardy in 2013. We'll see what happens with the May dividend, which is where the company has recently announced its annual increases.
• Reason to believe the growth can continue:  With a payout ratio of 51%,  the company retains about half of its income to reinvest for future growth. Additionally, since its cash flow statement indicates that its earnings are very well covered by cold, hard cash, there's little risk that a near-term cash crunch will derail those plans.

Balance sheet and valuation:

• Balance sheet: A debt-to-equity ratio of 1.1 indicates that the company does use debt, but very sparingly, and it certainly hasn't overleveraged itself to the point where a financial hiccup would derail it.
• Valuation: By a discounted cash flow analysis, the company looks to be worth around $6.2 billion, making its recent market price of $4.7 billion look cheap. Of course, there's some risk involved -- if the company loses its movie tie-ins, for instance, or if it once again finds itself missing the hot trend in toys, its business could falter.

Diversification fit:
The previous picks for the portfolio included:

• An industrial conglomerate
• A generic pharmaceutical powerhouse
• A provider of staple foods
• An auto parts distributor
• A safety equipment provider
• A high-tech titan

...making this toymaker a reasonable fit.

What are the risks?
Disney (DIS +0.00%) recently bought Lucasfilm (the company behind Star Wars), Pixar, and Marvel, making it a huge partner in Hasbro's movie tie-in strategy. Should the mouse decide to start playing hardball, a key revenue stream for Hasbro could be at risk.

Additionally, Zynga's (ZNGA +0.00%) Words With Friends is incredibly close in game play to Hasbro's Scrabble. Given Zynga's reputation that it liberally "searches and reapplies" other companies' intellectual property, Hasbro's other titles may come under the gun. Hasbro does make the board game version of Words With Friends, though, so it sounds like that particular situation has been handled amicably.

Hasbro is also in second place behind industry giant Mattel (MAT +0.00%) when it comes to American toy makers. While that smaller size gives it much more room to grow, it also makes Hasbro more vulnerable to being tripped up if and when it misses the next hot toy.

Still, the company keeps innovating. For instance, its new Monopoly Zapped brings that classic game into the digital era by integrating the board game with an Apple (AAPL +0.01%) iPad app that acts as banker and brings in mini-games on the tablet computer.

What comes next?
When the Fool's disclosure policy allows, I plan to buy Hasbro stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $37. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 65% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.

Also, to score the performance of this pick, I'm making an outperform CAPScall on the stock at Motley Fool CAPS, putting my All-Star ranking on the line along with the plan to invest cold, hard cash.