Written by Bob Ciura for Sure Dividend on June 27, 2017
For investors interested more in stability than excitement, Tootsie Roll Industries (NYSE:TR) is a stock worth considering. It has been in operation for more than a century. And it competes in a highly concentrated industry – candy – which is dominated by just a few huge companies.
This gives Tootsie Roll a consistent level of profitability, which has allowed it to pay dividends for decades on end. Even better, the company has increased its dividend since 1966 – a streak of 51 years.
Tootsie Roll is a Dividend King – a group of just 19 stocks, which have each raised their dividends for 50+ years. You can see the entire list of all 19 Dividend Kings here.
Its current dividend yield is relatively low, but the company makes up for this with annual dividend growth, along with stock dividends issued on a regular basis.
This article will discuss the company’s business model, growth potential, and why investors looking for a “sleep well at night” stock may want to take a bite out of Tootsie Roll.
Tootsie Roll is a confectioner. It was founded all the way back in 1896, when an Austrian immigrant named Leo Hirschfield cooked the chocolaty candy in his own kitchen.
Today, the company manufactures a wide range of candies. It competes directly with the industry giants, Nestle (OTCPK:NSRGY) and Hershey (NYSE:HSY). It has a large candy portfolio with many popular products.
(Source: 2016 Annual Report, page 1)
Tootsie Roll is under a fairly new management team.
In 2015, the company’s previous CEO Melvin Gordon passed away, after having led the company for more than 50 years. Gordon’s widow, Ellen, took the helm as CEO. Forbes estimates she owns more than half of Tootsie Roll’s shares.
Communication with investors is scarce, other than required filings with the SEC. For example, the company does not conduct earnings calls with analysts. It also does not participate in industry conferences.
That said, Tootsie Roll is a high-quality business. It operates in a stable industry, with a highly-profitable business model. And it enjoys a strong brand and possesses a healthy balance sheet.
In addition, the company has a steady growth outlook moving forward.
Tootsie Roll’s growth prospects are promising, if unspectacular. The U.S. is a saturated market with limited growth potential.
Sales peaked in 2012, at $546 million. Since then, they have steadily declined. Sales fell 3.6% in 2016, to $517 million.
However, the company effectively manages costs. Earnings per share increased 3.9% year over year and have grown each year since 2012, even though sales have declined.
2017 is shaping up to be another steady year. Sales were up fractionally in the first quarter, while cost cuts drove a 6.7% increase in earnings per share.
Future growth in the U.S. will likely be only a percentage point or two above inflation. There is continued growth potential in new markets and from development of new products. For example, last year the company unveiled several new items across its product line, including Cella’s Dips, caramel marshmallow Sugar Babies, and others.
It is also utilizing new methods of advertising, including an aggressive promotion last year on social media platforms, including Facebook, Twitter, and Instagram.
Competitive Advantages and Recession Performance
As one of the largest players in the North American candy industry, Tootsie Roll benefits from scale. The company has deployed automated manufacturing processes that have helped it gradually increase its profit margins over time.
Another competitive advantage is Tootsie Roll’s strong balance sheet. It ended last quarter with a current ratio of 4.5, meaning its short-term assets exceed its short-term liabilities by more than four times.
The company current assets include $78.5 million of cash. It also has $195.3 million in long-term investments, along with virtually no long-term debt.
A strong balance sheet provides the company with several advantages, including a low cost of capital and the financial flexibility to advertise or acquire other companies.
These competitive advantages allow Tootsie Roll to generate consistent profits, even when the economy enters a recession.
The company performed very well during the Great Recession:
- 2007 earnings per share of $0.70
- 2008 earnings per share of $0.54
- 2009 earnings per share of $0.75
- 2010 earnings per share of $0.76
Its earnings per share fell in 2008, but quickly recovered. The company sailed through the Great Recession, which is an indication of its recession-resistant business model.
Consumers do not typically cut back on candy purchases during recessions. This consistency awards Tootsie Roll with an above-average valuation.
Valuation and Expected Total Returns
Tootsie Roll stock trades for a price-to-earnings ratio of 32.5, based on 2016 earnings per share of $1.08. This is a fairly aggressive valuation – the S&P 500 Index, on average, has a price-to-earnings ratio of 25.8.
It is not entirely surprising to see Tootsie Roll trade for a higher valuation than the average stock, given its high-quality business model. However, it makes the stock somewhat unattractive for value investors.
Going forward, investors should not expect the valuation multiple to expand. But, it should continue to generate high-single digit total returns, based on earnings growth and dividends:
- 2-4% sales growth
- 1% margin expansion
- 1% share repurchases
- 1% dividend yield
Under this assumption, Tootsie Roll would return 5-7% each year on average, not including the 3% annual stock dividend.
The company currently pays an annual dividend of $0.36 per share. Based on its recent share price, this is a 1% dividend yield. This is a fairly low dividend yield, about half the level of the S&P 500 Index average.
However, there are several factors that make Tootsie Roll’s dividend sweeter than it appears.
First, Tootsie Roll increases its dividend each year. It has increased its dividend each year for more than five decades, including a 3% increase for the first-quarter 2017 payment.
Not only that, but it also distributes stock dividends each year. For instance, the company distributed a 3% stock dividend in April this year.
Tootsie Roll will likely never be considered an exciting business. It does not get much coverage in the financial media. However, the company is the epitome of slow and steady.
It offers a steadily rising dividend, along with a 3% annual stock dividend and modest earnings growth from year to year.
Tootsie Roll’s low dividend yield could make it less attractive for investors interested in higher dividend yields. That said, it does appeal for investors looking for consistent dividend growth.