Summary
- I think Hasbro Inc. is a great company with a rock solid dividend. In spite of slight overvaluation, I'm buying because of the generous dividend yield.
- I think it's possible to lower the acquisition cost somewhat by selling fairly deep out of the money put options.
- This company has been a slow growth cash cow for years, but the Entertainment One acquisition may kick things up a notch.
I think it's a good idea to get somewhat embarrassing confessions out of the way up front. I started playing Dungeons and Dragons in the early 1980s and have played intermittently ever since. There. I said it. It's out there now. There's nothing embarrassing about being an "adult" man who plays this game. Nothing to be ashamed of. I'm fine with it. Really. I like the game, though I'll admit that there are problems with it. Why, for instance, can magic users cast spells perfectly every time, even in the heat of a combat encounter, when concentration might be compromised?! For those few of you out there who don't play this game, ask yourselves if you could recite a 15 line poem you've just recently memorized while being attacked by wolves? Didn't think so. Why then do magic users of all stripes cast spells perfectly every time in all circumstances? Don't even get me started on the problem of feats...
Sorry to disappoint you, dear reader, but this isn't actually an article about the world's most popular role playing game. It's an article about the company that publishes that game, Hasbro Inc. (HAS). In this article, I want to review the company for the first time, and try to determine whether some of the capital I've recently freed up should go to work in this name. I'll try to make that determination by looking at the company and the stock as a thing distinct from it. As is often the case, I'll also recommend a short put for those who may be nervous about buying at current levels.
There may be some of you dear readers who worry that this article might have even more nerd references in it. To those people, I'll say definitively that it does. In order to save you from a horrible fate of reading about my half elf wizard or the Drow infested UnderDark, I'll leap right to the conclusion here. I think these shares are slightly overpriced at the moment, and I think investors who buy in should do so knowing that they may experience some volatility. These people should be comforted somewhat by the dividend, which is very sustainable in my view. It's also possible to generate very decent premia by selling relatively deep out of the money put options. For my part, I'll be both buying shares and selling puts.
Financial Snapshot
I think it's fair to suggest that Hasbro is a financial "cash cow", in that it's experienced quite modest growth over the past several years. In particular, since 2015 sales have grown at a CAGR of about 1.2%, while net income has grown at a CAGR of 3%, and EPS at a CAGR of about 2.6%. At the same time, the company has grown dividends per share at a CAGR of about 8% over the same time period. The first quarter of 2020 saw an increase in revenue of about 51% relative to the same period a year ago, and a swing from positive earnings of ~$27 million to a GAAP loss of about $70 million. This collapse in net income was caused by a $150 million expense associated with acquisition and related costs, which brings up the Entertainment One Ltd. (eOne) acquisition. At the end of December 2019. Hasbro paid $4.6 billion for this company, and financed it with $3.8 billion of cash. Fully $2.4 billion of this cash was generated by issuing unsecured notes, taking on ~$1 billion in term loans, and issuing an additional 10,952,106 shares at $95 each. More about eOne can be found on page 4 of Hasbro's latest 10-K. Some market participants reacted very favorably to this deal, and I think it will be accretive given that eOne had annual revenues of about $1.16 billion in 2019.
It's not all magic rings guarded by low hit point orcs over at Hasbro, though. Long term debt has grown at an eye watering CAGR of 25% over the past five years. In fairness though, over the same time period, net interest expense has declined at a CAGR of about 5.25%. This is obviously a function of the fact that the weighted average interest on debt has declined. The debt level does give me pause, though, because of its potential impact on dividends. I think high debt levels, and dividend growth at 8% in the context of EPS growth of 2.6% is as unsustainable as a first level party fighting a Beholder in its lair (sorry...that was the last D&D reference). At some point, either dividend growth must slow, or EPS growth must rise. I am interested to know if dividend growth is about to slow, as I think that has obvious implications for stock prices, and I'll try to answer that question by looking at dividend sustainability in general.
