3 Fun Companies for Your Portfolio
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People, for the most part, like to have fun and enjoy a little recreation. Companies that can profitably create a positive recreational experience can richly reward their shareholders. The three companies discussed below are adept at doing both.
Following the brand blueprint to wealth
Over the years, toy company Hasbro (NASDAQ: HAS) decided that focusing on what works will serve its shareholders best. Hasbro’s brand blueprint involves leveraging its strongest properties such as Transformers, G.I. Joe, the Monopoly game, Play-Doh, My Little Pony, and Magic: The Gathering.
Brands such as Transformers, G.I. Joe, and My Little Pony carry with them a legacy of good memories for adults approaching middle age that they want to pass on to their children, encouraging a whole new generation of consumers. In addition, Hasbro reinvents these properties every few years by refreshing a tired old line of toys for a new generation. For example, Hasbro recently refreshed the Transformers line with the release of a whole new incarnation called Transformers: Beast Hunters.
Magic: The Gathering creates the experience of fantasy, illusion, strategy, and camaraderie cementing the interest of its consumers as well. People crave engagement and this game provides that for them.
Hasbro parlays these brands into movies, television shows, and games. It even sometimes mixes genres. Recently, Hasbro entered an agreement with Walt Disney’s (NYSE: DIS) Lucasfilm to produce toys for the Star Wars/Angry Birds hybrid game. Hasbro also entered an agreement with Build-A-Bear where consumers can make their own My Little Pony.
Moreover, the Hub network serves as a conduit of advertising for television shows based on Hasbro related toys both old and new. As I write this Comcast’s Universal Orlando Resort announced the opening date (June 20) of Transformers: The Ride - 3D which will effectively utilize the Transformers brand in a theme park fashion.
Hasbro performed decently in its most recent quarter. Its revenue and free cash flow increased 2% and 4% respectively. In 2012, Hasbro paid out a reasonable 53% of its free cash flow in dividends giving shareholders a healthy 3.4% dividend yield as of this writing.
Hasbro will continue to benefit from the recent release of its G.I. Joe: Retaliation movie. Hasbro’s licensed toys will get a boost from the Iron Man 3 release and the upcoming Thor movie. Moving further out into the future, the next Transformers movie due for release in 2014 will certainly reinvigorate that brand once more. A future craze created by the scheduled 2015 release of the next Star Wars movie will most certainly benefit Hasbro’s licensed Star Wars line up.
The dolls that laid the golden eggs
While traditional brands represent the strength of Hasbro, the strength of toy rival Mattel (NASDAQ: MAT) lies in its new brands such as American Girl and Monster High. Worldwide sales of Barbie, Wheels category, and Fisher-Price all decreased 2%, 2%, and 7% respectively in Mattel’s most recent quarter. American Girl, by contrast, increased 32%. Monster High contributed to a 56% increase in Mattel’s Other Girls Brands segment.
The success of Mattel’s product mix leans heavily toward dolls while Hasbro’s success depends more on action figures. Mattel’s CEO invests heavily in determining the psychology behind doll demand.
Mattel’s overall sales increased 7%; however, free cash flow declined 187% due to a stark decrease in working capital. This represents a seasonally down quarter for the toy industry meaning that free cash flow will probably pick back up as the year progresses. In 2012, Mattel paid out 40% of free cash flow in dividends. As of this writing, Mattel currently pays a dividend of $1.44 per share per year translating into 3.2% dividend yield.
Mattel continues its innovation with the global expansion of the Max Steel brand which will entail toys, television shows, online content, and games. Mattel’s expansion into emerging economies introduces the world to the joys of American Girl, Monster High, Barbie, and Hot Wheels while serving as catalyst for future growth.
Entertainment conglomerate Walt Disney represents the mastermind of the fun experience. Disney’s greatest strength lies in its diversity. Walt Disney can take a set of characters and make movies, theme park rides, television shows, licensed merchandise, and websites about them.
Diversification also makes sense fundamentally for Disney. When one division lags, another one can pick up the slack. For example, Disney’s overall sales still increased 5% despite a slump in its studio entertainment segment. However, that same segment brought down Disney’s overall operating income 3% and drove free cash flow 45% lower for its most recent quarter.
Disney pays a solid dividend. In 2012, the company paid out 26% of its free cash flow in dividends. As of this writing it pays $0.75 per share per year equating to a 1.2% yield.
The Foolish conclusion
Walt Disney’s vast portfolio of science fiction universes such as the Marvel Universe, the Star Wars Universe and any worlds that Pixar can dream up will serve as powerful catalysts for future superior shareholder gains. In addition, its ESPN subsidiaries will continue to capitalize on bringing the sports experience to the consumer household.
On the whole, these companies specialize in good memories, experiences, and entertainment. They help people forget the doldrums of daily existence. Companies that can profitably do that will make their shareholders rich.
William Bias owns shares of Walt Disney. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. 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!