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With the new year off to a sluggish start, nine European sovereigns received debt downgrades from S&P and an earnings miss by JPMorgan (NYSE:JPM) shook up global markets. I thought it would be a good time to look into leisure stocks and recreation to take your mind off the economy. Just picture a 4-wheeler jumping over hillocks on an off-road trail or kids playing with the most recent action figure. It takes me back to my youth. We used go-karts, mopeds and dirt bikes (or do you remember the Indian Motorcycle?) back then and drove them (before the helmet law) like we were being chased by the devil.

I screened David Fish's CCC charts for good candidates and found four possibilities. Only one of these passed the Tweed Factor screen on his chart. I tossed out Bowl America (NYSEMKT:BWL.A) due to high p/e (44) and International Speedway Corp. (NASDAQ:ISCA) for low return on equity, low yield (.71%) and a cyclical price chart with downward bias. Since I wanted to compare 3 stocks, I added Mattel (NASDAQ:MAT), which was not a member of the CCC stocks.

What does this sector have going for it now, in the dead of winter? It is in the first sector to profit from sector rotation — Consumer Cyclicals. Will 2012 be the year that the economy booms again? I don't think so. However, there are signs that there will be sector rotation out of financial stocks and into a new business cycle. (Data from Yahoo Finance, and David Fish's CCC charts).

  1. Hasbro (NASDAQ:HAS) -- Consumer Cyclical Sector. Hasbro, Inc. engages in the design, manufacture, and marketing of games and toys, and other entertainment offerings worldwide. The company primarily offers children's and family leisure time, and entertainment products and services. This Dividend Challenger has 8 years of increasing dividends. The current yield is 3.7%*. The 5-year dividend growth rate is 22.3%, while last year's dividend growth rate was 21.1%. The current p/e is 11.4. The projected earnings per share growth rate for next year is 13.5%, while for the next 5-years it is 12.6%. *It should be noted that the yield does not meet my 4% minimum for initial investment. I would buy at the 4% yield point ($30).
  2. Polaris Industries (NYSE:PII) -- Consumer Cyclical Sector. Polaris Industries Inc. designs, engineers, and manufactures off-road vehicles. It offers all terrain vehicles and side-by-side vehicles for recreational and utility use; snowmobiles; and on-road vehicles, including motorcycles and low emission vehicles. This Dividend Contender has 16 years of increasing dividends. The current yield is 1.5%*. The 5-year dividend growth rate is 7.7%, while last year's dividend growth rate was 12.5%. The current p/e is 19.4. The projected earnings per share growth rate for next year is 18.9%, while for the next 5 years it is 18.1%. *It should be noted that the yield does not meet my 4% minimum for initial investment. Younger investors looking for a growth stock with a growing dividend should find this one fairly valued.

  3. Mattel -- Consumer Cyclical Sector. Mattel, Inc., together with its subsidiaries, engages in the design, manufacture, and marketing of various toy products worldwide. Its products comprise fashion dolls and accessories, vehicles and play sets, and games and puzzles. This company pays an erratic dividend and has switched from a yearly payment to a quarterly payment in 2011. The current yield is 3.26%*. The 5-year dividend growth rate is 7.19%, while last year's dividend growth rate was 10.8%. The current p/e is 13.9. The projected earnings per share growth rate for next year is 9.8%, while for the next 5 years it is 10.6%. *It should be noted that the yield does not meet my 4% minimum for initial investment. I would buy it at the 4% yield point ($23). The price chart has been cyclical since 2000 with an average price of $20.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF). It should be noted that HAS was much more resilient than the other stocks and SPY during the downturn of 2008, while PII had a much larger total return +150% over the period.


(Click to enlarge)

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

HAS

$.25

227.73

$56.93

PII

$.23

133.35

$74.99

MAT

$.23

399.04

$25.06

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (December 2010-December 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 234.26 $271.43 6.53
HAS 10/28/11 $0.33 232.25 $76.64 $38.07 2.01 $8,918.28
07/28/11 $0.30 230.51 $69.15 $39.70 1.74 $9,220.20
04/28/11 $0.30 229.03 $68.71 $46.47 1.48 $10,711.57
01/28/11 $0.25 227.73 $56.93 $43.91 1.30 $10,056.56
Totals 269.54 $150.69 .94
PII 10/28/11 $0.23 268.58 $60.43 $62.71 .96 $16,903.08
09/13/11 2/1 Stock Split 268.58 $0.00 $54.62 .00 $14,669.99
07/28/11 $0.23 134.04 $30.16 $117.77 .26 $15,815.50
04/28/11 $0.23 133.75 $30.09 $105.51 .29 $14,142.07
01/28/11 $0.23 133.35 $30.00 $74.99 .40 $10,029.92
Totals 413.15 $372.08 14.11
MAT 11/28/11 $0.23 409.76 $94.25 $27.86 3.38 $11,510.29
08/29/11 $0.23 406.22 $93.43 $26.37 3.54 $10,805.49
05/23/11 $0.23 402.70 $92.62 $26.32 3.52 $10,691.75
02/22/11 $0.23 399.04 $91.78 $25.06 3.66 $10,091.72

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

HAS

$56.93

$68.71

$69.15

$76.64

PII

$30.00

$30.09

$30.16

$60.43

MAT

$91.73

$92.62

$93.43

$94.25

Totals

$178.66

$191.42

$192.74

$231.32

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:


(Click to enlarge)

It can be seen from the table that the income for the year was $794.14. On an investment of $30k, this was 2.64% yield. It can also be seen from the Total Portfolio Value chart that the ending portfolio value was $37,331.65. This computed out to a gain of $7,331.65 or 24.43%. The capital gain on PII (including the effect of the 2/1 stock split) more than compensated for the slight loss on HAS.

When compared to SPY, these recreation stocks outperformed dividend wise and capital gain wise. SPY was flat for the year with 2% dividends, while these three stocks provided 2.64% yield and outsized capital gains.

Conclusion: The Consumer Cyclical Sector is the first sector to come out of a business cycle downturn. These three recreation stocks show an uptrend which could continue in 2012. The global demand for these products will have a decided effect on growth this year. Each investor must do their own due diligence on any investment. This study of dividend growth provides a great place to start your own analysis of the recreation industry.

Source: 3 Recreation Stocks For Sector Rotation