Can Mattel Thrive while Fisher Price Bleeds?
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When the market gets shaky, it is important to look for companies that offer a combination of growth, stability and dividends. Right now, Mattel (NASDAQ: MAT) is a shining example of such a company. Mattel has many of the brands we all know well, from the older brands such as Barbie, Fisher Price and Uno, to the newer brands such as Monster High, American Girl and Cars.
Growth
On its Q4 2011 conference call, Mattel announced record operating profit, high single-digit growth and solid margins, 50% gross and 16.6% operating. Mattel expects similar organic growth going forward, especially as they continue to expand internationally, particularly in China and India. However, its Q1 2012 results include a revenue decrease of 2%. This decrease was due to Cars 2 declines coming off the movie release in 2011 and continued declines in its Fisher Price brand. The Cars 2 decrease is to be expected and management believes this will still be a good evergreen product.
However, the company did not specifically address the problems at Fisher Price, noting only that there is still work to do. Fisher Price is important because it still makes up roughly one-third of Mattel's sales. While their American Girl and HIT Entertainment (Thomas & Friends) assets are growing very well and will likely be good long-term assets, they would have to grow by 250% to match the sales levels of Fisher Price. It will take outsized growth in these other areas to offset continued decreases in Fisher Price. Mattel's growth has been great, but they must stabilize Fisher Price in order for the rest of its business to shine through that gray cloud.
The Big Payout
The biggest positive to the Mattel story right now is the incredible dividend increase they announced going into 2012. Mattel raised its dividend by 35% to an annualized amount of $1.24 for 2012. That gives Mattel a 3.8% dividend yield. This is important for multiple reasons. First, as we discussed in our recent analysis of Lockheed Martin, the dividend provides known income that protects your downside risk, as there is only so far down a stock will go before stepping in to take advantage of the high yield...provided of course that the business isn't deteriorating.
Perhaps even more important though is that a large dividend increase like this signals management’s confidence in their earnings visibility. There is no way that a company would make this move if they were uncertain about their future. If Mattel has to reverse course later and pull back on their dividend, the stock will be crushed and it will take a long time for it to recover. That’s not a risk that any competent company is willing to take. Take a cue from this dividend raise: Mattel is very confident in its earnings and cash flow.
Competition
Mattel's biggest competitor and the company most similar to Mattel is Hasbro (NASDAQ: HAS). Hasbro has numerous popular brands of its own, a few of which include Transformers, Marvel, Spider-Man, Playskool, Nerf, and Parker Brothers.
Hasbro posted similar sales declines as Mattel in Q1, which makes me feel slightly better about Mattel's sales declines not being a Mattel-only issue. However, what's troubling for Hasbro is that they reported a $0.02 loss for the first quarter. Severance costs made up $0.06 of the loss, but that's still no way to start a year. Hasbro has Mattel beat from both a P/E (12.3 versus Mattel's 14.8) and dividend yield perspective (4.2% to Mattel's 3.8%). However, I prefer Mattel's stability to the more volatile Hasbro.
Strength
Mattel boasts a strong balance sheet and good operating cash flow to support their dividends and buybacks. In 2011, Mattel spent $840 million returning value to shareholders either through dividends or share buybacks. Mattel was able to repurchase over 20 million shares during 2011 at just over $26 on average. {For reference: 339 million shares are currently outstanding}. Mattel’s earnings visibility, extra growth potential and oversized dividend make it an excellent stock to own.
Zaegs has no positions in the stocks mentioned above. The Motley Fool owns shares of Hasbro and Mattel. Motley Fool newsletter services recommend Hasbro and Mattel. 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. If you have questions about this post or the Fool’s blog network, click here for information.
