With a yield above 3% and a 10-year compound annual growth rate of 22%, Hasbro's (NASDAQ:HAS) dividend is one of the best in the consumer goods industry. That payout strength has made the stock attractive to investors looking for income along with a good chance at capital appreciation.
However, after news broke last week that the toymaker was considering buying DreamWorks Animation for as much as $3 billion, income investors were right to worry that Hasbro's stellar dividend growth streak could be at risk. Hasbro would, after all, be acquiring an entertainment business that is nearly half its size and has booked a net loss as recently as 2012. With the deal apparently off the table for now, let's take a fresh look at what Hasbro dividend investors can expect from their payout.
Solid payout trends
After peaking at an uncomfortable 65% of trailing 12-month earnings last year, Hasbro's payout ratio is dropping to more sustainable levels. Investors can thank sharply higher profits for that dip: earnings last quarter spiked by 43%, which helped push the dividend payout ratio down to 57%.
That trend looks set to continue through the holiday season. Last quarter's $0.43 per share dividend amounted to less than a third of Hasbro's earnings. And Wall Street expects the company to book about $3.60 per share in profit in the fiscal year ahead, or roughly twice the current annual dividend payout of $1.72 per share. At a 50% payout projected for 2015, Hasbro appears to have plenty of room to continue its streak of solid dividend increases into next year.
Cash and debt
Hasbro is also generating a healthy amount of cash flow, with operating cash coming in at an annual pace of about $400 million. With help from the cushion of additional debt, which climbed to $1.6 billion last quarter, management has been returning much more than that $400 million annual total to shareholders.
Hasbro spent $163 million on dividend payments through the first three quarters of 2014. Spending on share repurchases jumped to $340 million in that period, more than the prior two years of stock buyback spending combined.
Consequently, Hasbro's dividend looks well covered by earnings and cash flow, with plenty of room for growth. Recent history also tells us that management prizes its dividend as a key channel for returning cash to shareholders. In 2009, for example, Hasbro was forced to skip its payout raise in the midst of the recession. But the company followed that brief pause with three consecutive dividend raises of 20% or more.
A too-big deal?
A huge purchase like the DreamWorks deal likely would have pushed executives down a similar path. Sure, Hasbro has room to scale back spending on stock repurchases. But that would have still left the dividend exposed to more volatile earnings in the short term and a higher debt burden.
The best-case scenario that income investors could have hoped for through a DreamWorks deal was a slower-growing dividend, at least in the short term as Hasbro digested the acquisition. Of course, the company would have bought some major benefits for that $3 billion price tag, including a strong TV and film platform that it could use to boost demand for its products. While that bet might have paid off eventually, Hasbro income investors can be glad that their substantial dividend payout is safe and still has good potential for growth ahead.
Demitrios Kalogeropoulos owns shares of Hasbro. The Motley Fool recommends DreamWorks Animation and Hasbro. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.