With the invention of intuitive iPads and the interactive Xbox Kinect, you would think children would be ready for technology to take over their childhoods. And that may be correct. iBook 2 might result in learning taking place exclusively in the digital world. In the meantime, kids are still kids, and they still enjoy playing with toys. Though it’s unreasonable to expect toys to absolutely explode in popularity, they’ve been around for hundreds of years, and they won’t go completely out of fashion tomorrow.
We think the digital age has beaten down shares of Hasbro (HAS) to an attractive valuation. The stock currently trades at around 11x our 2012 earnings forecast, with a dividend yield of almost 3.7%. With a great score of 2.1 on the Valuentum Dividend Cushion and our fair value estimate at $49 per share, we think Hasbro could be an interesting investment for dividend growth investors.
A portfolio of legacy brands
Even though Hasbro isn’t the developer behind World of Warcraft or Call of Duty, the legacy portfolio of brands at Hasbro isn’t too shabby. Among its earliest toys were Mr. Potato Head and GI Joe. Over the years, the company has added, via acquisitions and internal development, successful brands like My Little Pony, Tonka, Playskool, Milton Bradley of board game fame, Transformers, Ferby, and Nerf. The company operates with only a few competitors like Mattel (MAT) and Lego.
Over the years, many of the toy deals have come via licensing. This business is no slouch either, with a brand portfolio that includes Star Wars, Jurassic Park, Spiderman, The Avengers, X-Men, Iron Man, and The Incredible Hulk.
These legacy brands might not have significant growth, but they provide Hasbro with a constant stream of revenue with minimal marketing. A game like Monopoly no longer needs consumer awareness because it’s so ingrained in American society, and children’s games like Chutes and Ladders, as well as Candyland could be staples for generations to come. The company can also generate revenue for licensing these brands names out (think T-Shirts, McDonald’s Monopoly, etc.).
PlaySkool also should remain a popular brand for infants and early childhood for the foreseeable future. While it has competition from Fischer-Price, the brand has tremendous staying power and should continue to grow domestically and abroad. Though birth rates aren’t increasing as much in emerging markets, general economic prosperity in China and India should increase demand for these products, which are already created there.
Where’s the growth without video games?
While there may be a generational shift towards video games, there is ample opportunity for the company to gradually grow revenues and expand margins. For 2012, Hasbro will produce the toys for several major films, including The Avengers, Star Wars Episode I: The Phantom Menace, Spiderman, and GI Joe. Each presents an interesting opportunity for collectors of everything related to Star Wars and the Marvel Comic films. The company can release higher priced, limited editions items for these films. Furthermore, Star Wars popularity should accelerate with the re-release of it as a 3D experience, exciting younger children and collectors.
GI Joe provides an excellent opportunity, since Hasbro actually created the brand and will license out the film. The last was a blockbuster hit, and this upcoming film, with a star-heavy cast, should perform even better. It may not be able to provide the company with tremendous top-line growth, but it should help off-set some of the natural decline of older legacy brands as well as non-electronic toys.
Even if it’s a slow decline, the business continues to throw tons of cash
During the worst year of the most recent recession, 2009, Hasbro still earned over $100 million in free cash flow, which increased to over $300 million last year. Without significant financial leverage, we think this number should steadily increase over the next several years. If this continues, we think management will continue to increase the dividend and buy back loads of stock, as it has done over the past few years.
Ultimately, the company does not deserve a large multiple, but with free cash flow steadily increasing, a strong business portfolio, and streams of new revenue growth, we think the shares are undervalued. With a large dividend and significant room for further expansion, we think it’s one of the best opportunities in the portfolio of our Dividend Growth Newsletter.