Hasbro (HAS 12.44%) owns an iconic brand portfolio, but the business hasn't been performing all that well of late. In some ways, the weak revenue and earnings trends make sense, with investors reacting by pushing the stock down roughly 35% over the past year. With the dividend yield up to 5.3% or so, should income-focused investors be jumping in?
A big player
Hasbro is one of the world's largest toy makers, with brands like Play-Doh, Nerf, Monopoly, My Little Pony, Transformers, Magic: The Gathering, and Dungeons & Dragons, among many others. In addition to these owned properties, it also licenses brands from others, including Disney's massive Marvel and Star Wars franchises. That's a pretty strong base from which to build a toy business.
Image source: Getty Images.
And the business is substantial, with 2022 revenue of roughly $5.9 billion. Earnings came in at $1.46 per share last year, though adjusting for one-time items brings that total up to $4.45.
The problem is that Hasbro's revenue in 2021 totaled $6.4 billion, with earnings of $3.10 per share and adjusted earnings of $5.23. As you might expect, Wall Street has not been pleased with this consumer discretionary company's performance of late, which helps explain the steep stock price decline.
And yet that decline has pushed the dividend yield up to a historically attractive 5.3%. The only time in the last decade that the yield has been higher was during the early days of the coronavirus pandemic in 2020. At that point, economies around the world were effectively shut down to slow the spread of the illness. It would be understandable that long-term dividend investors might be interested in the stock today, assuming that recent performance is a temporary setback, not a long-term headwind.
Nothing too great planned for 2023
Unfortunately, a return to top-line growth is not in Hasbro's plans in 2023. At present, the company is guiding to a revenue decline in the low single digits. Adjusted earnings are expected to fall between $4.45 and $4.55 per share.
In other words, earnings will be flat to slightly higher, based on an expected improvement in the company's adjusted operating margin of up to 70 basis points. That's not a great earnings outlook, and certainly not one that would back a huge stock rally from here.
That's not the only bad news here. While the company highlighted the fourth-quarter strength of its Wizards of the Coast business, which was up 30% year over year, that brand was only up 3% for the whole year, with operating profits off by 2%.
When you step back from this single brand, sales were down across all the company's major business segments in 2022. The fourth quarter, which includes the all-important holiday selling season, was particularly weak. So Hasbro appears to be entering 2023 on its back foot, which is reflected in the soft guidance but still deserves to be highlighted.
In addition, rising interest rates have Wall Street worried that a recession could unfold in 2023. Given that toys are optional purchases, the industry tends to be cyclical in nature. So the guidance provided by the company would likely turn out to be optimistic if economic activity fell sharply.
In other words, it doesn't seem like there's any reason to rush to buy Hasbro stock, since, even by the company's own admission, performance isn't likely to be great this year.
What about the dividend?
That said, the dividend seems reasonably safe. The $2.78 per share per year in dividends paid in 2022 was not covered by GAAP earnings. That's a warning sign of risk. However, the adjusted earnings payout ratio was 60% or so, which isn't unreasonable. Investors should be monitoring the payout ratio, but probably shouldn't be overly worried about it.
HAS Total Long Term Debt (Quarterly) data by YCharts
The balance sheet, meanwhile, has a sizable amount of leverage following a material acquisition in 2019, but the company has been working the balance down and is covering its trailing-12-month interest costs. The balance sheet is investment-grade rated, but is just at the very bottom of the range. So investors should also be watching the company's financial state closely.
All in all, the odds of a dividend cut seem modest, but they certainly aren't zero.
Probably wait
Hasbro does appear to be an attractive dividend stock, but given the business and economic backdrop, there's probably no need to do anything about that right now. There looks to be another middling year ahead that will likely test the mettle of all but the most stalwart long-term investors.
Meanwhile, truly conservative dividend investors might want to wait until there's a more pronounced uptick in performance (or at least an improvement in management's guidance) before buying. Indeed, you can probably find a virtually risk-free CD from a bank that's yielding nearly as much as Hasbro is today.
