Should You Prefer Hasbro or Mattel?

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The toy industry in the United States is a two-headed beast, with Hasbro (NASDAQ: HAS) and Mattel (NASDAQ: MAT) the major players. Most of us have likely come across one or more of the famous brands these companies carry.

Hasbro has a product portfolio that most consumers would easily recognize: games including Monopoly and Scrabble, and toy brands including Nerf and G.I. Joe. Meanwhile, Mattel’s stable of great brands includes Barbie, Hot Wheels, and the Fisher-Price and American Girl brands.

While these two companies might seem identical at first glance, there are some subtle differences between the two stocks that investors would be wise to consider before jumping in to either one.

A highly profitable toy story

It’s understandable that investors would have a hard time separating Hasbro and Mattel from one another. Their stocks trade with similar valuation profiles and they each carry similar dividend policies.

To illustrate, consider that Mattel trades for 19 times trailing earnings and yields 3.2%, while Hasbro exchanges hands for 17 times earnings and yields 3.5% at recent prices. Mattel is the larger company of the two, with a market value almost three times Hasbro’s.

The two companies have experienced varying degrees of success in terms of their underlying operations. This is where investors can see some divergence in performance.

2012 served as a difficult year for Hasbro. Hasbro saw revenues fall 4.5% year-over-year, and its diluted earnings per share fell 10% from 2011. Hasbro has had trouble digging itself out of the hole caused by the Great Recession. Its sales are barely above where they were back in 2009.

Mattel, meanwhile, realized 2% growth in net sales and diluted income per share in 2012 versus the prior year. Mattel has done a much better job getting its business back on track in the years since the financial crisis. Its sales are up 18% since 2009.

Their fiscal first quarter results continued this trend of Mattel materially outperforming its rival Hasbro. Mattel reported first-quarter revenues increased 9% year-over-year, whereas Hasbro was only able to realize 2% revenue growth as opposed to the first quarter of 2012.

Smaller competitor JAKKS Pacific (NASDAQ: JAKK) might be a better fit for die-hard growth investors who aren’t afraid to roll the dice on a speculative bet. JAKKS carries a much smaller market capitalization of just $217 million and has seen a good deal of volatility in recent years, both in terms of its stock price and its underlying performance.

After trading near $19 per share exactly one year ago, the stock has gone on a nearly uninterrupted collapse down to its current level of $10 per share. The stock has lost almost half its value over this time period, due primarily to falling sales and profits.

JAKKS’ sales fell almost 2% last year and have fallen every year since 2008. That’s never a good sign, particularly in a time when the economy was in recovery.

Furthermore, exploding interest expense has dealt an additional blow to the company. JAKKS saw interest expense nearly quadruple in 2012 versus 2008 levels, and the company lost $4.37 per share last year.

Shareholder rewards aplenty

Despite the differences in sales performance over the past few years, both Hasbro and Mattel have given investors healthy dividend increases since the recession ended. This is because, even though sales aren’t exactly booming, both companies are cutting expenses and buying back stock to boost profitability. This has allowed them to keep their dividend streams flowing.

Hasbro and Mattel are often mentioned as among the market’s premier dividend stocks, both for their hefty payouts and their practices of increasing their dividends on an annual basis. Their dividend growth is a stark contrast to JAKKS Pacific.

Whereas JAKKS cut its dividend 30% in early 2013, Mattel and Hasbro both recently gave their investors healthy pay bumps.

Hasbro raised its first-quarter dividend 11%, and has doubled its payout over the past five years. Mattel raised its own dividend by 16% in the first quarter and has also nearly doubled its dividend over the past five years.

On the bright side for JAKKS investors, the company still yields 2.8%, but its financials and dividend are going in the wrong direction. Hasbro and Mattel are extremely similar stocks. Mattel trades for a slightly higher multiple and yields slightly less than Hasbro, but it’s undeniably executed better in the years since the recession ended. As the saying goes, premium stocks command premium valuations.  As a result, I’d consider Mattel to be the winner of the toy wars.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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