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Profiting from Fun and Games

Profiting from Fun and Games

 

Owning shares of companies in a variety of industries reduces the risk that you will react emotionally (often selling when you should be buying and vice versa). With a widely diversified portfolio, when one industry is out of favor another may be in favor, helping to stabilize your overall portfolio.

 

Diversification is easy for DRIP investors. They have the luxury of opening accounts with as little as a single share of stock and building holdings over time with small dollar amount investments. By investing the same amount regularly, you'd buy more shares at lower prices and fewer at higher prices. This strategy, known as dollar-cost averaging, keeps you from chasing high prices and assures that you buy shares at the lowest possible cost (even lower than the average price during the period you are acquiring shares). For more information about DRIP investing, go to directinvesting.com.

 

As conservative long-term investors, our first priority is to cover the most obvious industries--oil and utility companies, health care, defense, and consumer staples. And, typically, we screen for companies that pay dividends. However, a truly conservative approach would provide for the widest possible portfolio diversification.

 

This month we identified companies that cater to people's need for fun and relaxation. We searched for companies with attractive fundamental values, strong franchises, and histories of increasing earnings. Some of the companies would have qualified based on dividends and dividend growth screens but others would have been eliminated. Regardless of the state of the economy, and often in response to it, people seek to enrich their lives with things that refresh their spirits. Companies that satisfy your need for fun and entertainment should be represented in every portfolio as people will always spend money on the things that give pleasure to themselves, their children, and grandchildren. What's more, companies that are using earnings to enhance their businesses should also be represented in a diversified portfolio.

 

As one of the world's largest toy makers, Hasbro, is a preeminent force in the "fun" industry with brand names that include Hasbro, Playskool, Tonka, Tiger, Milton Bradley, Parker Brothers., Nerf, Tinkertoys, and GI Joe. Earnings and dividends have both been growing at double-digit (percentage) rates over the past 10 years. Coupled with an above-average current dividend yield of 3.8%, that strength should provide an attractive total return for years to come.

 

We also selected online content provider Yahoo!. The company is likely to reward shareholders with a one-time special dividend, based on its sale of nearly half of its stake in China's Alibaba Group for $7.6 billion. (Prior to the deal Yahoo owned 40% of Alibaba and will own 23% once the deal is complete. In addition, Alibaba also made a one-time-cash-payment of $550 million to satisfy an amendment to the companies' intellectual property license agreement.) Yahoo! will return $3 billion of the after-tax proceeds to shareholders, having already spent $646 million on stock buybacks.

 

To minimize the impact of investing fees, invest larger amounts even if less frequently say, quarterly instead of monthly. Also, when investing quarterly, it's a good idea to send your investment a couple of weeks before the Dividend Record Date. That way, each of those investments will earn a dividend sooner rather than later.

 

Boston Beer (SAM) is a specialty brewer with plants in New York, Ohio, Pennsylvania, and Oregon that sells about 2.5 million barrels of ale, lager, beer, and cider annually under the brand names Samuel Adams and LongShot. It entered the Canadian market in 2000. Officers and directors own 34.8% of the 12.9 million shares. SAM does not pay a dividend. It is expected to earn about $4.15 per share this year and $4.71 in 2013, compared with $3.76 in 2011.

 

Brunswick Corp. (BC) is one of the largest makers of recreational products in the United States. It makes boats, as well as bowling, billiards, and gym equipment. After recording a loss in 2009, it produced earnings of 78¢ per share in 2011, which is expected to rise to about $1.59 this year and $1.95 in 2013. If projections hold up, it could be earning $3.00 by 2015.

 

Comcast Corp. (CMCSA) is America's leading cable service provider and also provides high-speed Internet and telephone service and operates regional sports and news networks. At last count, it served some 22.3 million video, 18.1 million high-speed Internet, and 9.3 million phone subscribers. The company earned $1.29 per share in 2010, $1.58 in 2011, and should net about $1.93 this year and $2.20 in 2013. Dividends have been paid (and raised annually) since 2008.

 

Cracker Barrel Old Country Store (CBRL) operates 620 company-owned restaurants in 42 states and features gift shops attached to each restaurant that offer decorative, gift, food, and novelty items. Since 2004, both earnings and dividends have been rising. Two dividend increases this year boosted the payout from 25¢ to 50¢ per share. Consensus estimates call for CBRL to earn about $4.68 in fiscal 2013 (ends in July) and $5.49 in fiscal 2014, up from $4.61 in fiscal 2012.

 

Darden Restaurants (DRI) is the world's largest casual dining operator, with about 2,000 restaurants in the United States and Canada, operating under the Red Lobster, Olive Garden, LongHorn Steakhouse, Capital Grille, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, Wildfish Seafood Grille and recently added Yard House USA names. It also owns about 50% of the land and buildings where its restaurants are located. Earnings per share are expected to be about $3.89 in fiscal 2013 (ends in May) and $4.38 in fiscal 2014, up from $3.58 in fiscal 2012.

 

Harley-Davidson (HOG) has more than 1,000 dealers worldwide and is the most renowned manufacturer of heavyweight motorcycles in the world. From 1986 to 2007, the company enjoyed an unbroken string of record earnings, but profits dipped from $3.93 in 2006 to just 6¢ in 2009, prompting the company to cut its dividend. In 2010, HOG earned $1.38 per share, followed by $2.33 in 2011, and analysts expect $2.76 per share this year and $3.43 in 2013.

 

Hasbro Inc. (HAS) is one of the world's largest toy makers. The company also makes interactive CD-ROM versions of its popular board games. Officers and directors own 13% of the 138.4 million shares. Over the past 10 years Hasbro has had a dividend growth rate of 17% and it has an above-average yield of 3.8%. Consensus estimates call for the company to earn about $3.05 in 2013, compared with $2.78 in 2011.

 

Hershey Company (HSY) is a premier candy company that makes chocolate and other candy under the brand names Hershey's, Reese's, Mounds, Kit Kat, Good n' Plenty, Cadbury, Jolly Rancher, Milk Duds, and others. Except for 2008-9, the company has had annual dividend increases dating back to 1976, and consensus estimates call for the company to net about $3.23 per share this year and $3.57 in 2013. The Hershey Trust owns 7.7% of the 223.7 million common shares and 99.9% of the 60.629 million class B shares, which carry 10 votes per share.

 

Kohl's Corp. (KSS) operates 1,146 department stores in 49 states (and a website), selling private and national branded apparel, footwear, and accessories for women, men, and children, as well as housewares and bedding, targeted to middle-income consumers. Kohl's is expected to earn about $4.61 per share in the fiscal year that ends in January and $5.11 in fiscal 2014, compared with $4.30 in fiscal 2012. It began paying dividends in 2011.

 

Marcus Corp. (MCS) owns three and operates 12 hotels, motels, and resorts in six states. It also owns over 600 movie screens at 50 locations in four states. Officers and directors own 4.7% of the 29 million common shares. The book value of $12.17 per share is above the current market price. Earnings of 78¢ per share for fiscal 2012, was up substantially from the 50¢ earned in 2011. (Only one analyst follows Marcus and estimates earnings of 73¢ 85¢ per share in the current fiscal year.) A 3.1% dividend yield adds to this issue's attractiveness.

 

Marriott International (MAR) owns 3,800 lodging properties with over 640,000 rooms worldwide. Brand names include Marriott, Ritz-Carlton, Renaissance, Residence Inn, and Courtyard. The company also develops and operates vacation time-share resorts. Officers and directors own 16.2% of the 322.8 million outstanding shares, which is down from 471 million 10 years ago. Earnings are expected to total about $1.69 per share this year and $2.01 in 2013, up from $1.33 in 2011.

 

Mattel Inc. (MAT) is the largest toy manufacturer in the United States. It's portfolio includes Mattel, Barbie, Disney Classics, Hot Wheels, Matchbox, Harry Potter, Yu-Gi-Oh, Batman, Justice League, Megaman, Fisher-Price, Little People, Rescue Heroes, BabyGear, View-Master, Sesame Street, Barney, Dora the Explorer, Winnie the Pooh, InteracTV, See 'N Say, Power Wheels, and American Girl. Earnings are expected to be about $2.46 per share this year and $2.72 in 2013, compared with $2.18 in 2011.

 

McDonald's Corp. (MCD) is the operator and licensor of the world's largest fast-food chain. At last count, it operated over 33,700 restaurants in 117 countries, of which 81% were operated by franchisees. The company generated revenues of over $27 billion in 2011, with earnings of $5.27 per share, which should rise to about $5.42 this year and $5.96 in 2013. Dividends, are $3.04 per share and should grow by about 8.5% annually.

 

Nike Inc. B (NKE) enjoys strong global brand recognition for its sports clothing, footwear, and accessories. Its total debt of $369 million is only 2% of capitalization and it is sitting on $3.27 billion in cash. The dividend has risen from 24¢ per share in 2002 to the present $1.44, while earnings have gone from $1.23 to $4.73 in fiscal 2012. Analysts expect the company to net about $5.18 in fiscal 2013 and $5.92 in fiscal 2014. Officers and directors control 74.6% of the 90 million Class A shares and 19.1% of the 368 million Class B shares.

 

PepsiCo (PEP) is a leader in two highly profitable fields: non-alcoholic beverages and snack foods. In the former, its brands include Pepsi-Cola, Mountain Dew, Diet Pepsi, and Tropicana. In the latter, its brand names include Doritos, Ruffles, Lays, Fritos, Cheetos, and Quaker Oats. Earnings have risen from $1.96 per share in 2002 to $3.98 in 2011, and analysts expect the company to earn about $4.06 per share this year and $4.42 in 2013.

 

Polaris Industries (PII) manufactures all-terrain vehicles (ATVs), snowmobiles, and motorcycles (under the Victory name). It also provides a variety of accessories and spare parts for its machines through 1,500 dealers in North America. Earnings are expected to be about $4.17 per share this year and $4.91 in 2013, compared with $3.20 in 2011.

 

Southwest Airlines (LUV) was founded in 1967 and is one of the largest passenger airlines in the United States. It operates about 700 aircraft and provides service to 72 cities nationwide, offering low-cost, no-frills service. The stock's book value is $9.21 per share and the company's total cash assets of $3.26 billion and total debt are almost identical. Share buybacks have lowered the share count by 60 million during the past three quarters. Consensus estimates call for the company to earn about 65¢ per share this year and 96¢ in 2013, compared with 43¢ in 2011.

 

Stanley Black & Decker (SWK) Makes hand tools, power tools, household hardware, garage door openers, and similar products. Sales are primarily through do-it-yourself retail outlets. Earnings rose from $3.96 in 2010 to $5.24 last year. Analysts expect the company to net about $5.50 per share this year and $6.36 in 2013.

 

Walt Disney Company (DIS) is a major entertainment firm, with a long-term history of growth. It is the owner of parks, the ABC network, several cable TV network channels, a cruise line, and a film library that can be sold over and over again. A new theme park has recently opened in Hawaii. Disney was expected to have earned about $3.08 in the fiscal year that ended September 30, up from $2.54 in fiscal 2011, and to go on to net about $3.51 per share in fiscal 2013.

 

Yahoo! Inc. (YHOO) is a global Internet communications, commerce, and media company that provides navigation, content, e-mail free of charge, earning money via marketing and advertising services to businesses. The company has over $1.9 billion in cash, with a total debt load of only $130 million. Analysts expect earnings per share of about $1.02 this year and $1.17 in 2013, up from 82¢ in 2011, and are projecting 12% annual earnings growth out to 2016-7.