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Will Mattel Help You Retire Rich?

Dan Caplinger
August 21, 2012

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Mixing work and play may seem like a no-no, but the toy industry has become big business around the world. Global toy giant Mattel (Nasdaq: MAT  ) has certainly come a long way from the days when its Barbie franchise was a pioneer in the industry. Now, licensing deals and multimedia tie-ins play an increasingly important part of generating revenue. Can Mattel keep up with the rapid pace of change? Below, we'll revisit how Mattel does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Mattel.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $12.2 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.92 Fail
  Worst loss in past five years no greater than 20% (12.9%) Pass
Valuation Normalized P/E < 18 19.46 Fail
Dividends Current yield > 2% 3.5% Pass
  5-year dividend growth > 10% 10.7% Pass
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 47.4% Pass
  Total score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Mattel last year, the company has kept its six-point score. Shareholders are happy about a nearly 50% gain for the stock, despite the fact that it's made the shares look a lot more costly in the past year.

Mattel and rival Hasbro (Nasdaq: HAS  ) have been at loggerheads for years. With the two companies fighting for market share on retailers' shelves, both have come up with impressive distribution models that help them cut costs and lock out weaker competitors.

But arguably, the greater concern for Mattel is (Nasdaq: AMZN  ) , which is doing its best to knock down those barriers to entry. By offering its own distri