Hasbro's Long-term Outlook Outweighs Short-term Uncertainty; Dividend Profile Remains Strong

Shares of Hasbro, the company behind iconic toy brands such as Nerf, Transformers, and My Little Pony, are trading near 52-week lows as consumers have grown more price-sensitive and holiday sales proved sluggish.

Preliminary results shared on January 26 by the toymaker show sales down over 10% in 2022, driven by weakness in the back half of the year when consumers' sensitivity to inflation began to manifest.

In response to reduced consumer spending, promotional activity will likely accelerate as Hasbro works to wind down heavy inventory levels that started the final quarter of the year over 50% higher than usual – a decision made by management to avoid a repeat of the 2021 holiday shortages. 

While unwinding this inventory overhang will undoubtedly pressure near-term margins, earnings are expected to hold up in the year ahead and provide ample dividend coverage, backed by the strength of Magic, the firm's first brand to generate over $1 billion in revenue.

Magic, a fantasy card game created in 1993, generates higher margins than traditional toys and now contributes more than a third of the company's profits.

In conjunction with Dungeons & Dragons, another fantasy franchise owned by the company, Hasbro has exposure to a devout fanbase of serious gamers that has grown for decades.

Hasbro has developed mobile versions of these popular games to foster further engagement with these iconic franchises. These digital platforms make these fantasy worlds more accessible while providing additional opportunities for revenue growth through in-game purchases.

And following the boost in toy sales from the firm's successful visual entertainment productions, like the My Little Pony movie and the Transformers and Power Rangers shows found on Netflix, Hasbro has planned releases for the noted popular fantasy franchises.

An animated TV series titled Magic: The Gathering will soon debut on Netflix, and a theatrical release of the live-action feature film Dungeons & Dragons: Honor Among Thieves starring Chris Pine is set for March. 

The opportunity to expand the reach of these fantasy worlds could provide further momentum for these enduring brands and prove a growth catalyst for the company.

Looking beyond Hasbro's near-term challenges in reducing inventory and slowed retail spending, the company's solid portfolio of popular brands that appeal to children and adults should provide a long-term platform for cash generation. 

And Hasbro's cash reserves of over $500 million could provide short-term stability if needed for the roughly $400 million annual dividend and the firm's minimal debt maturities through late 2024.

This solid financial footing and the firm's notable debt reduction in recent years earned Hasbro a credit rating upgrade to BBB from S&P last year.

Overall, the toymaker's enduring brands, improved balance sheet, and solid dividend coverage suggest the firm is likely to continue its 20-year streak of paying uninterrupted dividends. 

As such, we are reaffirming Hasbro's Safe Dividend Safety Score.

Conservative investors willing to ride out some near-term uncertainty may find now a reasonable time to consider the stock, with Hasbro trading at an attractive valuation.

However, with so much uncertainty around consumers' financial health and the looming threat of recession, we will keep an eye on Hasbro and provide updates as needed.