Mattel, a Totally Cool Stock
Tue, 17/08/2010 - 11:01 by David Meier
Leading the Vanguard Windsor Fund, John Neff beat the market by more than three percentage points per year for more than 30 years. That's an incredible track record and the difference between $39,116 and $17,449 on a $1,000 investment, assuming a 10% average return. Here's the master's secret: Two of those three percentage points came from dividends. So while Neff worked hard to buy cheap stocks, dividends were crucial to outsized returns. That's totally cool!
To help find totally cool stocks that offered value and income, Neff used his total return ratio, defined as:
Total Return Ratio = (analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio
Neff would compare company ratios to the market's ratio. If a company's ratio was at least 50% greater than the market's, he gave it look. If Neff's research revealed the market misinterpreted the company's prospects and thus created an opportunity, he purchased shares for the portfolio.
Currently, the market's total return ratio is about 0.95. (I used a Shiller P/E of 20.1, a yield of 2%, and two-year estimated earnings growth of 17.2%.) So to meet Neff's criteria, a company's ratio must be greater than 1.43.
Chances are Mattel (NYSE: MAT) toys have been in your home at some point. From Hot Wheels to Barbie, Mattel has been making toys for boys and girls since 1945. Let's see if it can bring some joy to our portfolios.
2-Year Growth Estimate
Total Return Ratio
Hasbro (NYSE: HAS)
JAKKS Pacific (Nasdaq: JAKK)
Of the three toy companies listed above, Mattel offers the best total return opportunity. Not only does it pay the highest dividend, analysts also expect its earnings to grow the fastest over the next two years. And with the lowest P/E among these three, the market could be offering a great bargain, too.
The Foolish bottom line
Neff's total return ratio is beautiful because it combines value and income: cheap stocks with dividend kickers. Investors can profit from multiple expansion while collecting dividend payments along the way. And as Neff showed, done correctly, this strategy can lead to excess returns over the market. As with any metric, Neff's total return ratio is just a starting point. But with a total return ratio of 1.58, Mattel certainly seems like a totally cool stock to get to know.
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