We continue to be very pleased with the performance of one of the largest holdings in the Dividend Growth Newsletter portfolio. View Valuentum’s Dividend Growth Newsletter portfolio here (login required).
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“If I had asked people what they wanted, they would have said faster horses.” – attributed to Henry Ford
By Brian Nelson, CFA
Entrepreneur Henry Ford had to be very careful listening to customer feedback when he first rolled out the automobile. If he hadn’t focused on his vision, he would have found himself trading the assembly line for a line of stalls housed to breed faster horses. The thought-processes behind the Valuentum strategy are much like those of Henry Ford selling the very first automobile to the American public. Though the horse and automobile both address means of transportation, the latter required a brand new way of thinking about travel itself. The automobile wasn’t “wrong,” if there can be a right or wrong in this case – it was just different. The type of open-minded thinking by Americans that made the Ford Co (F) a success is a lot like what we expect from readers on how to think about the Valuentum process. We’re offering an “automobile” in a time when investors are still looking for faster horses.
Let’s provide a few examples. Where some investors may want to buy a stock immediately when it becomes undervalued, we wait for the technicals to turn positive before allocating any portfolio assets to that same undervalued stock. This extra care prevents us from falling into “value traps” while ensuring that we have the conviction and buying power of the market behind us. Where some investors may want to sell a stock at fair value, instead we let our winners run. Fair value estimation in any form is as much art (forecasting) as it is science (financial modeling), and you know this as well as we do. The concept is to be embraced. That’s why we use a fair value range and only consider stocks to be “truly” overvalued when they exceed the high end of the fair value range – and only when their technicals roll over would we then highlight them as a potential source of cash for the newsletter portfolios. Like the automobile, the Valuentum process is straightforward, but it takes time to get used to, to understand its intricacies. Early 20th century onlookers may not have understood the internal workings of the combustion engine, but they sure loved the benefits of the automobile, even if they still kept a stable of horses.
As you may have gathered from the introduction of the April edition of the Best Ideas Newsletter (pdf) (login required), we’re operating on a different level than what you might be used to. Our service isn’t about throwing darts at a dart board and surfacing new idea after new idea such that our readers are inundated with new information. What good is that? There’s nothing to be gained if we highlight 1,000+ ideas and only 25 of them work out. What if our readers only pick from the 975 losers? In our view, it’s far better to surface 30 ideas over a couple years, for example, where 25 of them work out to the readers’ benefit than the alternative. Others may start and shut down underperforming products or publish with something “new and exciting” every other minute, but readers should note that we’ve only had two newsletter portfolios of ideas since our inception, and both newsletter portfolios continue to outperform their respective goals. It has been a win-win for readers that have simply been open to the ideas of the newsletter portfolios – where we incorporate the Valuentum process as we’ve designed it to be carried out.
Hasbro (HAS) is another example that showcases the benefits of the Valuentum line of thinking. The inception of the Dividend Growth Newsletter portfolio (view the April edition of the Dividend Growth Newsletter here – pdf) welcomed shares of the digital licensing giant at the end of 2011 at $31.89 per share, and its performance has been among the best of any dividend growth idea since then. Shares are indicated up this morning to the mid-$80s and have now surpassed the high end of the fair value range. But why might we not be looking to remove the company from the Dividend Growth Newsletter portfolio immediately in light of this news? For starters, on a technical basis, the company continues to exhibit strong momentum indicators – meaning the market believes a higher valuation (price) may be more appropriate, and we’re paying attention. Upon next update, the company’s Valuentum Buying Index rating won’t register one of the lowest ratings on the system because for us to remove it from the newsletter portfolio we’d demand overpriced shares to also be experiencing selling pressure (poor momentum indicators). We’d expect Hasbro’s fair value to have an upward bias to it after considering its fantastic quarterly report, released April 18 – all pointing to having more patience with shares at current prices. Do you see the important behind the art of the Valuentum process?
Let’s now dig into Hasbro’s report. During its first quarter of 2016, revenue advanced 16%, and backing out foreign exchange, the top line jumped an incredible 20%. Hasbro has advanced beyond its roots as merely a physical toy company, and the company generated fantastic revenue growth almost across the board – Boys (+24%), Girls (+41%), Preschool (+11%), and franchise brand (+1%). Hasbro continues to benefit from the tremendous momentum of the Star Wars: The Force Awakens, Disney (DIS) Princess and Frozenproduct sales, the latter particularly well as evidenced by growth in the Girls category. The firm’s segment operating profit growth was also great, with the only notable headwind coming from the non-repeat of a multi-year digital streaming in its Entertainment and Licensing business line. We would have liked to see better profit performance in this area, but we’re not concerned. All-in, Hasbro’s operating profit and net earnings advanced nearly 60% and more than 80%, respectively, in the period.
We’ve been saying for some time, “You Must Be So Pleased” (April 2015), “Biggest News of the Day: Hasbro Beats Mattel and Jakks Pacific for Frozen Dolls” (September 2014), “Hasbro Continues to Shine(October 2014)” that the age of Barbie may be over, with profound negative implications on the long run at Barbie-maker Mattel (MAT), which we believe has only caught a bid as of late in light of its relatively higher but far more risky of a dividend yield. We maintain our opinion that Hasbro is the clear winner in the Hasbro-Mattel rivalry, and the share-price performance of each tells their respective stories well. Hasbro’s shares have advanced more than 60% since the beginning of 2014, while Mattel’s shares have dropped nearly 25%. Hasbro returned more than $90 million to shareholders in the quarter, with nearly two thirds of it coming in the form of dividends, and the company remains as shareholder-friendly as ever. The firm raised its quarterly payout to $0.51 per share, a 10%+ increase from its prior payment of $0.46. We couldn’t be more pleased with one of the largest holdings in the Dividend Growth Newsletter portfolio. The stock now yields ~2.5%.
But what now? Well, the fourth quarter of Hasbro, or the holiday season, is what tends to make or break the year for the company, but we like what we see out of the gates thus far in 2016. Management echoed our opinion in saying they “are very encouraged with global demand and (its) outlook for 2016,” and we have no reason to believe that the rest of 2016 won’t be as robust in light of ongoing product momentum and the popularity of products in its portfolio, especially with princess dolls. Hasbro has a slight net debt position, but it’s not much to worry about as the company pulled in a very impressive ~$260 million in free cash flow during the first quarter alone, or 4.5+ times its cash dividend payments in the period and an incredible 31.5% of net revenues generated! This is simply phenomenal free-cash-flow conversion, and something we’d expect more from an asset-light, high-ROIC software company – illustrating just how robust Hasbro’s fundamentals have become thanks in part to its closer relationship with Disney and highly-profitable entertainment and licensing mix.
With the dividend growth “bubble” still inflating, “The Bubble Is Still Inflating,” the pickings have become slim when it comes to uncovering deeply undervalued dividend-paying stocks in today’s market, so our stance remains the same on Hasbro – we’re going to continue to let this big winner run. As many readers know, we continue to view constituents in the Dividend Growth Newsletter in a portfolio setting with a focus on achieving the goals of the newsletter portfolio much like a mutual fund, for example, evaluates its constituents. One might not ask whether it’s too late to own a mutual fund much like one might not ask whether it is too late to own the constituents in the newsletter portfolios because they have performed so well. Of course, we can never tell you to own anything as only your personal financial advisor that knows your personal investment goals and risk tolerances can tell you what might be appropriate.
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This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at info@valuentum.com.