Mattel Pulls Out Its Wallet

Contrary to what you may have heard, toys aren't the only thing that Mattel (NYSE: MAT) is recalling these days.

Yes, like fellow Chinese-toy-hawking toymaker RC2 (Nasdaq: RCRC), Mattel yanked many of its products from store shelves after discovering they were decorated with lead paint. But on a happier note, just this morning we learned that Mattel is also recalling a couple dozen million of its own shares. Yes indeedy, folks, Mattel has joined the buyback binge.

On Tuesday, Mattel announced that it had added $500 million to its share buyback authorization, the latest installment of a program that has seen the toymaker retire 81.4 million shares over the last four years at an average price of $18.43 per stub. Good news? Bad news? Before we can be sure, we'll need to crunch a few numbers and gauge whether (1) Mattel can afford the buyback, and (2) even if it can, whether it should.

Can it pay?
Mattel generated a whopping $617 million in free cash flow over the last 12 months. At that rate of cash production, Mattel could run through the whole buyback in well under a year.

Should it pay?
That's the real question, isn't it? After all, Mattel shares currently trade for about 17% more than the average price it paid to buy back shares over the last few years. Then again, Mattel is not the same company today that it was when it began buying itself in February 2003. Let's see how the company stacks up to its peers:

	PEG Ratio	Price-to-Free Cash Flow	Projected Growth Rate
Mattel	1.44	13.9	9%
Hasbro (NYSE: HAS)	1.46	17.6	10%
RC2	1.04	10.3	14%
JAKKS Pacific (Nasdaq: JAKK)	0.96	9.5	10%

I don't mean to rain on Barbie's tea party here, but I just don't see the logic behind a buyback at today's prices. Mattel is priced a bit higher than its peers, with the exception of Hasbro. Personally, I'd be much more inclined to invest in either of the two smaller toymakers -- RC2 or, even better, the as-yet untainted-by-China JAKKS, than in Mattel.

If Mattel really wants to make its shares more attractive to investors than those of its competitors, raising the dividend yield might be the more Foolish choice here.

RC2 is a Motley Fool Hidden Gems pick and Hasbro is a Stock Advisor pick. Take a free 30-day trial to any of the Fool's newsletters and watch your wallet grow.   

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.