Published Mon, 26 Nov 2012 16:30:00 CET by TopYields.nl
The holiday shopping season is starting officially this week. Hence, while it may be a good time to look for bargains, is it really a good time for investors to shop for stocks of dividend-paying toy retailers? Mattel (Nasdaq: MAT) and Hasbro (Nasdaq: HAS), the world's largest toy makers, are currently paying relatively high dividend yields of 3.4% for the former and 3.8% for the latter. Both have beat earnings expectations in the past two quarters, and their forward valuations are attractive relative to historical trends. However, general trends in toy retailing in the developed markets cloud the sales outlook, despite the overly bullish expectations about future industry growth. With this in mind, a closer look at the two toy retailers suggests that, going forward, Mattel may be a better dividend investment, despite its lower dividend yield.
According to Goldman Sachs, the toy industry in the developed markets is in dire states. In the United States alone, the nominal amount spent on traditional toys and games per capita declined from $85 in 1998 to $60 in 2011. That represents a nearly 30% decline since 1998; however, the pace of declines is accelerating this year. According to data from a research firm Euromonitor, between 2008 and 2011, the U.S. toy industry growth was flat. In Europe, the situation is not much different, with per capita spending declining and industry growth slowing to about 3% per year over the past three years. The economic slowdown in the United States and a recession in Europe, characterized by high unemployment and tight fiscal spending, are likely to dampen the consumer propensity to spend on discretionary items such as toys. Given that both Mattel and Hasbro derive as much as 60% of their sales from the U.S. market and another 30% from Europe –making its total of up to 90% from the mature developed markets– the outlook looks rather cloudy.
Nevertheless, the industry expects to expand its reach in the emerging markets, buoyed by the ascendance of the middle class in industrializing nations, in particularly in Brazil, Russia, India, and China, the so-called BRIC nations. In fact, by 2020, some 86% of the world's middle-class households will be located in emerging nations in which current spending per capita on toys is a mere fraction of the nominal amount in the mature markets. Hence, rising incomes in emerging markets are expected to boost the demand for toys, both in nominal, per child level and in absolute terms. Based on this, Mattel recently presented a bullish outlook for the industry in the 2012-2016 period, in which, based on the industry data from Euromonitor, it expects to see global industry growth more than doubling to 7% per year from the average rate of growth of 3% achieved over the past three years. Especially robust should be sales in Latin America and Asia (China and India), which are forecast to grow at an average rate of about 10% per year in the noted period.
These new sales trends should bode well for both Mattel and Hasbro. However, which will be a better dividend play in the future? The past performance suggests that, despite Hasbro's higher dividend yield and exceptionally robust dividend growth over the past five years, Mattel has outperformed Hasbro in terms of total returns. Hence, over the past five years, while Hasbro grew its dividends at a higher average annual rate of 18%, it achieved a lower total return averaging 10.2% per year. Mattel, which grew its dividends at a 14% annual rate over the past half-decade, achieved a total return of 17.2% per year. It should be noted that Mattel outperformed Hasbro in terms of total returns despite the latter's faster EPS growth over the past five years, which averaged nearly 17% per year, compared to 7.3% for Mattel. Now, in terms of total return on equity (ROE), Mattel's ROE is higher at 31% than Hasbro's at 24%.
Stock symbol(s): HAS,MAT
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