The ongoing battle between Hasbro (NASDAQ: HAS ) and Mattel (NASDAQ: MAT ) gets more complex with every passing year due to new, fierce competition from virtual game competitors. As a result, both Hasbro and Mattel are eagerly searching for new growth avenues.
One such opportunity exists in international market growth potential but as is usually the case, success in new markets is never guaranteed. In this arena, one of the toy-maker giants is solidly outperforming its rival, and as such, deserves first priority from investors.
Cash returns to shareholders a key piece of the puzzle
Mattel and Hasbro have rewarded their shareholders handsomely through strong dividends. Mattel raised its dividend earlier this year by 16%,while Hasbro bumped up its own payout by 11% this year. Each stock carries a market-beating dividend that is surely a contributing factor behind their popularity with individual investors. While the broader S&P 500 index provides a yield of roughly 2%, Mattel and Hasbro both yield approximately 3.4% at recent prices.
This is one area which separates Mattel and Hasbro from the competition. Much smaller industry player JAKKS Pacific (NASDAQ: JAKK ) has only paid a dividend for two years, but there are already red flags that investors should be aware of. The company slashed its payout by 30% earlier this year as its underlying business has deteriorated. JAKKS Pacific's revenue is down 16% through the first half of the year, and its costs have risen at the same time.
Not surprisingly, then, is that it has posted a $68 million loss over the first six months of the year, more than triple the loss recorded during the same period last year. Put simply, JAKKS Pacific's profits and dividends are going in the wrong direction, and investors should view these are serious causes for concern.
Emerging market growth is the key differentiator
It's a well-known fact within the toy industry that North America is a saturated market, where toy sales are flat-lining. The rapid rise in popularity of mobile gaming has taken traditional toy makers by surprise. They are struggling to adapt.
The major toy makers, Mattel and Hasbro, naturally have turned their attention toward the emerging markets, where under-developed economies present stronger growth potential. However, on this front, there's a stark difference in performance between the two U.S. giants.
Mattel's international segment grew sales at a 4% rate last year, double its performance from North America.A similar trend occurred this year, as Mattel has posted 4% growth in international markets over the first half of 2013.
Hasbro is guiding investors toward an optimistic outlook, but I'm not sure it should be believed. At its recent investor day, the company provided its future expectations, which call for double-digit growth in emerging markets.However, the company's recent performance in that arena should leave investors skeptical.
Hasbro's sales in its international segment actually declined by 4% last year, including a surprising decline in its Asia Pacific segment. In fact, Hasbro's international growth has under-performed for several quarters now. The company has posted a 2% net sales decline through the first half of the current year, including a 6% drop in international sales in the second quarter.
Hasbro did launch a cost-savings program in light of its weak results, which will likely help boost profits in the near term. The company is targeting $100 million in savings by 2015, but reducing expenses seems like a knee-jerk reaction to me and not a real reason to be optimistic going forward.
In the end, Mattel looks to be in a better position
Hasbro and Mattel share some similar characteristics. Combined, they control the vast majority of the North American toy industry. They each trade for comparable valuation multiples, and similarly reward investors with 3.4% dividend yields. And, going forward, they'll likely continue to offer decent dividend growth rates.
However, undeniable differences present themselves when you consider their respective futures. Growth in North America is hard to come by, leaving international expansion as the prime growth driver going forward.
Unfortunately, Hasbro is falling short to Mattel in the race to international prominence. Both Mattel and Hasbro promise big things from their international segments, but Hasbro's poor performance on this matter means investors should consider Mattel to be the better-positioned toy company going forward.
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