Investors found plenty of good news in Hasbro's (NASDAQ:HAS) recent earnings report. The stock set a new all-time high this week after the toy maker showed solid momentum heading into the critical holiday shopping season.
That bounce should make Hasbro shareholders doubly happy. Not only is their stock one of the highest-yielding in the market, with a 3.2% annual return. But shares are also now outperforming the S&P 500 for the year. Strong dividend income plus capital appreciation; what's not to like about that?
Broad-based sales growth
Income investors will definitely like the fact that Hasbro's Q3 performance included sales growth across geographic regions and product lines. Revenue was up in the North America market by a solid 4%. But Hasbro also booked gains internationally, led by a 24% spike in Latin America. Globally, revenue improved by 7%, which stands in stark contrast to rival Mattel's 8% slide.
You can see the same rising tide trend playing out when you look at Hasbro's business by product line. The company managed its biggest sales gains in the Boys division, which logged a 22% quarterly revenue gain. Nerf, Transformers, Marvel, and Star Wars products were all standouts in that group.
And the Girls and Games divisions both contributed to the gains, thanks to stronger demand for My Little Pony toys and for Monopoly and Magic: The Gathering games. In fact, each of the company's seven blockbuster brands (Littlest Pet Shop, Magic: The Gathering, Monopoly, My Little Pony, Nerf, Play-Doy, and Transformers) grew in the quarter.
The only big-name decline came from Hasbro's preschool segment, which posted a 7% sales slip. In a conference call with analysts, management blamed that shortfall on a tough comparison with last year's results. Those were boosted by a particularly popular Sesame Street toy (thanks, Big Hugs Elmo).
About that elevated payout ratio
Besides robust growth, Hasbro is also making strides at strengthening its dividend. The company for a while now has had a payout ratio approaching 70% of trailing 12-month profits. That's about as high as income investors would want to see before they start getting nervous about the outlook for dividend growth. After all, management has delivered a 22% compound annual growth rate for the payout over the last decade and a too-high ratio could set the stage for an end to that fantastic growth.
The good news for investors is that earnings are headed higher, and that's sending the payout ratio back down. In the quarter that just closed Hasbro's $0.43 per-share dividend represented less than a third of the company's earnings. And looking ahead, analysts expect Hasbro to book $1.31 of EPS next quarter, which will amount to another reasonable payout ratio of 33%.
Stock buybacks are in style
Going forward, keep an eye on Hasbro's cash stockpile, which dropped to $450 million from $600 million in the prior year. Much of that difference is due to the ramped up level of stock buybacks. Hasbro spent $340 million on share repurchases over the last nine months, more than in the prior two years combined.
Management has a long track record of using both stock buybacks and dividends to return big chunks of cash to shareholders. Stock repurchases are the preferred method these days, but Hasbro could still afford a substantial dividend hike for next year, particularly if the Q3 business momentum carries through to the holiday quarter.