This Cheap Dividend Stock Is 40% Undervalued and Yields Nearly 6%

To say the stock of toymaker Hasbro HAS is unloved is an understatement: It’s trading down 60% from its 2019 high, and given lingering concerns about consumer spending, the share price weakness may persist. But at current prices, we think that Hasbro stock is attractive for long-term investors who can ride out short-term uncertainty. Hasbro lands on our analysts’ list of their favorite 33 undervalued stocks for the quarter. It is also among Morningstar chief U.S. market strategist Dave Sekera’s five cheap value stocks that look like bargains—for now.

Hasbro holds a leading position in the nearly $30 billion North American toy industry, developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The company has differentiated its business model via its digital properties exposure, content creation ability, and key licensing arrangements. Production capabilities support Hasbro’s multimedia presence, as does Discovery Family, a joint venture that brings Hasbro’s brands to television. Hasbro has historically dominated the big screen, building brand loyalty and generating new streams of revenue from its licensing businesses like Star Wars and Marvel. We think Hasbro and the toy industry have a modest runway for growth through international growth and acquisitions of strategic players. We expect cash flow to increase, thanks to catalysts like strong film launches, new licenses, and expense leverage. This should reward investors with rising dividends and a share-buyback program, along with a return to 3 times forecast debt/EBITDA in 2024.

Key Morningstar Metrics for Hasbro

• Fair Value Estimate: $88
• Star Rating: 5 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: Medium

Economic Moat Rating

In traditional toys, Hasbro is one of the three player that together control about 40% of the fragmented U.S. market (which in turn is around 30% of the global market). This significant market share, along with the licensing and entertainment relationships already contracted by industry incumbents, is enough to present challenges for potential competitors entering the market. It would be difficult for new entrants to directly compete for new licensing contracts. Hasbro’s position in entertainment with Discovery Family, production capabilities, and strong film industry connections allow the company to capture media partnerships with relative ease, as it is an obvious choice for any partner to pair with, given its wide audience reach and ability to aggressively spend on marketing. The toy industry was historically more capital-intensive than traditional retailing because of the manufacturing, but Hasbro has embarked on an asset-light strategy, which improved working capital demands.

Read more about Hasbro’s moat rating.

Fair Value Estimate for Hasbro Stock

Our fair value estimate is $88 per share. We project flat sales through 2027, allowing Hasbro to reach $5.7 billion in sales in 2027. This includes an 8% decline in 2024, given the sale of significant entertainment assets. Our long-term operating margin forecast is around 23%. We believe ongoing investment in innovation across the brand blueprint could intermittently bound potential upside in profitability. Hasbro has launched an expense-reduction plan of $250 million-$300 million in annual run-rate savings (5.5% of total costs). However, this plan comes at a cost of around $200 million over 2022-24, so we are unlikely to see the full program benefit until 2024. Revenue opportunities and cost savings should drive robust returns on invested capital. We expect average adjusted ROIC including goodwill of 16% through 2027.

Read more about Hasbro’s fair value estimate.

Risk and Uncertainty

Customer concentration raises the risk that changes to ordering patterns could affect profits. Cooperation among retailers could affect the amount of promotional spending demanded and hamper Hasbro’s margin. E-commerce remains a key channel for the distribution model. While Hasbro has risen to become a top toy seller on Amazon, this could change the profitability profile of Hasbro over time, depending on concessions the toy maker may have to offer. Additionally, new toy peers can incorporate and attempt to take share from Hasbro. Although trademarks exist on Hasbro’s brands, there aren’t structural barriers to prevent a competitor from developing a new toy or capturing a license from an existing partner.

Read more about Hasbro’s risk and uncertainty.

Hasbro Bulls Say

• Opportunities exist in entertainment, bolstered by the Discovery Family network, owned production capabilities, and film tie-ins, supporting product demand.
• Hasbro is compelling for income investors. The stock yields nearly 6%, and the company has paid out around $1.8 billion in dividends in the past five years. The dividend payout ratio should remain above 40% over the long term as free cash flow rises.
• The company enjoys a stable expense base and should be able to leverage operating margins to above 20% as higher-margin games become a larger percentage of the total sales mix.

Hasbro Bears Say

• The market for traditional toys could continue to shrink as technology plays a more dominant role in product selection and children shift to more digital toys at a younger age.
• The consolidated retail channel leaves Hasbro at the mercy of its largest outlets, which could affect profits, depending on demand for promotional spending.
• Dislocation from the supply chain and bloated retail network inventories could intermittently weigh on profits, particularly during periods of economic duress.

This article was compiled by Susan Dziubinski and Sylvia Hauser.