Hasbro (HAS -1.80%) is one of the leading toy and games companies, owning popular brands like Play-Doh, Magic: The Gathering, Dungeons & Dragons, Monopoly, Nerf, and Transformers. Growing revenue and free cash flows delivered solid returns and increased dividends for shareholders.
But high inflation proved too much for the company last year. Weak sales trends caused the stock to fall 40% in 2022, underperforming the S&P 500 index.
The stock price fell another 9.4% year to date as the company reported weaker-than-expected revenue results for the fourth quarter. Management's guidance for 2023 earnings per share also came in below Wall Street's estimates.
The good news about the lower stock price is that it pushed Hasbro's dividend yield to a tempting 5.06% -- more than triple the S&P 500 average. Let's dive deeper into Hasbro's performance to determine whether its above-average yield is worth it.
2023 could be another challenging year
Sky-high inflation weighed heavily on consumer spending during the holiday quarter and caused many retailers to report weak revenue results, so Hasbro's weak quarter wasn't surprising. But the company's full-year revenue also fell 9%, which reflects company-specific issues that need to be corrected.
Lower sales and higher inventories led to Hasbro's operating profit falling in half last year. In October management went back to the drawing board and fine-tuned its Blueprint 2.0 strategy. This plan aims to improve its supply chain while focusing on fewer, bigger, and more profitable brands.
Hasbro executives expect the weak sales trends in the fourth quarter to carry into the first half of 2023 before getting better later this year. For the full year, company guidance calls for revenue to be down in the low-single digits over 2022.
How lower sales impact the dividend payout
Hasbro has paid a growing dividend since 1977, so it's time-tested. It's a testament to the long-term growth in the toy industry, and Hasbro's ability to adapt its products to changing consumer preferences, with strong growth in recent years from its digital gaming business.
But investors should be aware that Walt Disney suspended its dividend a few years ago. Disney needed the extra cash to offset the losses from its theme parks being closed during the pandemic. Disney's decision to suspend its dividend highlights the risk of buying Hasbro for its yield alone.
Hasbro's free cash flow has fallen from a peak of $1.1 billion to $198 million. Last year, in order to sustain its quarterly dividend payout of $0.70 per share, it paid a total of $385 million in dividend payments, or nearly double its free cash flow, which is not sustainable.
Some companies can sustain their dividends even when profitability falls because they have plenty of cash in reserve. But Hasbro doesn't have the luxury of a healthy balance sheet right now. It ended 2022 with a net debt position of $3.3 billion.
Hasbro still has a lot to prove
Hasbro's weak financial position and sales performance stress the urgency for the company to cut costs and get its free cash flow back up.
Management aims to reduce bloated inventory, which should boost cash flow in the near term. Cost savings across the company, including layoffs of its workforce, are expected to improve adjusted operating profit margin between 50 and 70 basis points in 2023, based on management's guidance.
If these efforts improve free cash flow, the stock could be undervalued right now and deliver excellent returns. But I wouldn't want to make that bet right now, especially with the threat of a recession still lingering on the horizon. After all, Hasbro's fourth-quarter results showed it is vulnerable to lower consumer spending.
Those interested in boosting their income might want to look for safer dividend stocks with more cash than debt on their balance sheets or wait a few quarters to see how Hasbro's cost-cutting efforts are coming along before buying the stock.