Dividend Report Card: Hasbro

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal, but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Hasbro (Nasdaq: HAS), which posts a 2.2% yield.

Dividend history

Source: Capital IQ, a division of Standard & Poor's.

This is truly a great five-year dividend growth rate, and Hasbro has done a nice job keeping it on pace with earnings growth.

We won't ding Hasbro here for its dividend cut in 2000, since its current quarterly dividend of $0.25 now far exceeds the $0.06 per share it paid at the time of the cut. Still, investors should always remember a company's past dividend actions.

Past returns don't guarantee future results, however, so dividend history is only 10% of the final grade. That said, for this category, Hasbro scores a 5 of 5.

Sustainability

Source: Capital IQ, as of Jan. 26, 2011.

Based on the interest coverage ratio, Hasbro still generates plenty of operating profit to cover its interest expenses, but investors should keep an eye on this figure going forward. The interest coverage has declined to 8.3 times, from 15.3 times in 2007, while the company's debt-to-equity ratio has increased from 61.7% to 101.4% over the same period.

Hasbro appears to have sufficient levels of earnings and free cash cover to maintain its current payout. 

Growth

The potential for future dividend growth is bright, but I wouldn't expect a repeat of the 23.5% annualized growth of the past five years. The median analyst estimate for long-term growth at Hasbro is 10%, which is probably closer to the annualized dividend growth rate you could reasonably expect in the next few years if the board intends to raise the dividend in line with EPS growth.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against direct competitors'. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

With its current yield at 2.2%, Hasbro's dividend yield is in the Goldilocks position -- not too high, not too low -- relative to its peer group.

Pencils down!
With all the numbers in, here's how Hasbro's dividend scored:

When you're considering stocks yielding 2%-3%, you should demand at least 6% dividend growth potential to help make up for the low starting yield. Hasbro certainly appears to have that potential, but dividend-focused investors would be wise to keep an eye on Hasbro's rising debt and monitor free cash flow generation. 

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