Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll take a close look at Hasbro (HAS +1.74%) and I'll remind everyone that investing, while serious, can have its fun moments.
Do not pass go. Do not collect $200.
To put it mildly, there's been little clowning around in the toy and game sector of late. Perhaps the only thing we can count on more than disagreements in Congress is that children as a whole will see their interests change in a heartbeat multiple times over the next couple of years. What this means for toy companies is that they need to constantly be on the front end of the innovative scale and can't languish over failed ideas for too long -- because there will be many failed ideas.
JAKKS Pacific (JAKK +0.19%) shares, for instance, were massacred last week after it lowered its full-year sales guidance by more than 10%, revised its full-year forecast from a modest profit to a hefty loss, and suspended its quarterly dividend indefinitely. Without its Pokemon licensing, JAKKS is struggling to find new sources of revenue growth.
The story was very similar for Mattel (MAT +1.96%) whose core brands, which have survived decades of changing interest by children, are beginning to lose their luster. Specifically, Mattel reported the fourth straight sales decline for its iconic Barbie brand. Overall sales for the second-quarter trudged higher by less than 1% -- no thanks to a 2% drop in North American sales -- while profit actually fell by 24%.
But the sector struggles aren't confined to what you might refer to as stale gaming brands. LeapFrog Enterprises, a maker of educational tablets for children, has seen its share price move lower or head sideways for much of the past year as a combination of lofty shareholder expectations, and the potential for competition from the likes of Toys R Us or Google remains a constant threat. It also doesn't help that LeapFrog has historically been a very cyclical company. Until LeapFrog and the toy sector as a whole break those cyclical ties, they may struggle to excel throughout the year.
Source: Philip Taylor, Flickr.
Get out of jail free!
However, not all toy and game makers have such a bleak outlook in the short term. Hasbro, maker of Monopoly, Transformers, and other brand-name iconic toys, is using strategies that could help put it at the top of the toy pile among its peers.
To begin with, partnerships are a key component to Hasbro's ongoing success. In 2009, Hasbro entered into a deal with media company Discovery Communications (DISCA +0.00%) to create a channel known as the Hub, which would feature programming based on Hasbro's owned toy lines. Since 2010, when the channel made its debut, sales of My Little Pony have taken off. In the wake of its renewed success, the franchise released a new movie in June, which will go onto DVD later this summer.
Content deals are also very important to Hasbro's success, with many of its core brands marketable on television or the big screen. That's why Hasbro signed a multiyear deal in 2012 with Netflix (NFLX 0.75%) to bring programming such as Transformers and G.I. Joe to family living rooms wherever Netflix operates. The deal is a win-win for both companies, as it greatly expands Hasbro's audience on the factor of convenience alone, while giving Netflix broader appeal to families with a bigger library of kids programming.
Hasbro has also been changing the way it markets to children. Although its most recent quarterly results showed a double-digit decline in sales of boys' products, it was countered with a double-digit increase in sales to girls. Marketing to girls represents a large missed opportunity for Hasbro -- and not just in the traditional sense of dolls like Mattel, with its line of Barbies. Earlier this year, Hasbro launched a line of Nerf Rebelle foam products, including a bow, specifically targeted at girls. It should be able to re-engineer much of its product line to better target both sexes.
Show me the money, Hasbro
But, when I look at Hasbro, I see much more than a great investment -- I see dollar signs from its ongoing share buybacks and generous dividend!
In 2011, Hasbro added an additional $500 million to its share repurchase program. According to the company's press release at the time, since it announced its original share buyback in 2005, it had repurchased $2.3 billion worth of shares. Whereas this money doesn't go directly into shareholders' pockets, it does help to reduce total shares outstanding and make the company appear cheaper on a P/E basis.
The big moneymaking potential here lies with Hasbro's dividend growth. Although it had a dividend hiccup in 2001, Hasbro's dividend has grown by an average of 29.6% per year since 2003. In other words, Hasbro's dividend has jumped 1,233% per quarter in just a decade, as it's taken advantage of content deals and broadened its audience appeal.
Source: Nasdaq.com.
*Assumes quarterly payout of $0.40 for remainder of 2013 and 2014.
Based on its projected payout of $1.60 for the year in dividends, Hasbro is divvying out only 50% of next year's profits, a sustainable amount that could be subject to further double-digit dividend increases.
Foolish roundup
Sometimes the fun things in life do make for some of the best investment. Hasbro's ability to reignite the passion for its core brands among today's youth through content deals and broad-audience targeting is really beginning to pay benefits for shareholders. With the company growing its dividend by an average of nearly 30% per year over the past decade and currently yielding 3.4% -- far and away better than a CD at your local bank -- investors seeking dividend income need look no further than Hasbro for a great dividend idea.
