Dividend Kings In Focus: Tootsie Roll Industries

Up to date on September twentieth, 2023 by Aristofanis Papadatos

Tootsie Roll Industries (TR) has a dividend development observe file that few firms can rival. The corporate has elevated its money dividend for over 50 consecutive years, when together with its annual inventory dividend.

Its dividend historical past places Tootsie Roll among the many elite Dividend Kings, a small group of shares which have elevated their payouts for at the very least 50 consecutive years.

You’ll be able to see the complete record of all 50 Dividend Kings right here.

As well as, we created an inventory of all Dividend Kings, together with necessary monetary metrics corresponding to dividend yields and price-to-earnings ratios.

You’ll be able to obtain your copy of the Dividend Kings record by clicking on the hyperlink under:

Dividend Kings are the “better of the perfect”, in relation to rewarding shareholders with money.

Tootsie Roll Industries has a protracted historical past of dividend development, however the present yield is comparatively low at 1.2%. Subsequently, it’s not a extremely interesting inventory for revenue.

This text will focus on Tootsie Roll’s dividend and valuation outlook.

Enterprise Overview

Tootsie Roll traces its roots again to 1896 when Leo Hirschfield started promoting his sweet from a household recipe in his store in Brooklyn. He then went to work for The Stern & Saalberg Firm, which later grew to become The Sweets Firm of America, and ultimately morphed into the enterprise we all know at this time.

The corporate’s historical past of innovation in relation to sweet merchandise started with Hirschfield’s creative thoughts creating numerous patents surrounding the best way candies are made and certainly, the very texture of the corporate’s signature Tootsie Roll. That spirit of innovation was key to Tootsie Roll’s starting and its subsequent development, one thing that was helped alongside by two world wars.

Tootsie Roll noticed great development and mainstream adoption of its candies throughout World Warfare 1 and World Warfare 2 as Tootsie Rolls had been added to navy rations, owed to their very powerful texture that would stay agency anyplace troopers might go.

Whereas WW1 and WW2 had been horrible occasions in human historical past, they helped make Tootsie Roll into what it’s at this time. To its credit score, the corporate seized the chance to provide its treats to the US navy and that relationship continues by way of at this time.

Tootsie Roll’s market capitalization is $2.1 billion, and the corporate produces about $725 million in annual income.

The overwhelming majority of gross sales are made within the US however the firm does promote its merchandise in Canada and Mexico as properly. Tootsie Roll sells its merchandise by way of a community of ~4,000 clients that embrace wholesalers, low cost chains, greenback shops, supermarkets, the US navy and others. It additionally sells its merchandise on to shoppers by way of its web site.

Tootsie Roll’s manufacturers have grown through the years from the unique Tootsie Roll to varied spin-offs of that model, in addition to completely new traces.

The corporate branched out into bubble gum with its 2004 acquisition of Harmony Confections; it additionally makes lollipops of assorted varieties and a few chocolate merchandise as properly. Though Tootsie Roll has moved into some totally different sweet merchandise, it nonetheless has a really slender focus and whereas that permits it to be excellent at what it does, it additionally means development alternatives are restricted, as evidenced by its years of primarily no development.

Tootsie Roll definitely has its area of interest constructed out on the planet of sweet, however it’s not with out its dangers. First, it’s beholden to commodity costs, identical to another sweet maker.

Tootsie Roll clearly buys a variety of sugar and corn syrup and therefore the swings within the costs of those commodities can considerably influence the corporate’s profitability. Tootsie Roll often hedges the costs of those commodities but it surely can not escape the truth that it’s topic to the whims of the markets wherein these and different commodities commerce.

Tootsie Roll additionally has largely mounted working prices at its manufacturing amenities. Consequently, when income declines, profitability suffers.

As well as, there’s additionally the matter of Tootsie Roll’s twin class construction, and the truth that it’s run primarily like a non-public firm by the Gordon household. The household controls the overwhelming majority of the voting rights of Tootsie Roll, so the corporate is below full management, simply as it could be if it had been personal.

Subsequently, so long as the Gordon household is in cost, it seems Tootsie Roll goes to easily preserve establishment as a substitute of chasing development alternatives or a sale of the corporate.

Tootsie Roll possesses a protracted record of consumers however it’s significantly reliant upon Walmart (WMT), which accounts for about one-quarter of the corporate’s complete income.

That is a gigantic reliance upon one buyer. Whereas it signifies that Tootsie Roll has a fantastic relationship with Walmart, it additionally signifies that ought to Walmart determine to dedicate invaluable shelf area to a unique product, Tootsie Roll might lose an amazing quantity of income.

The corporate’s relationship with Walmart has grown through the years so this isn’t a severe danger, however it’s definitely one thing for traders to look at provided that Tootsie Roll is so reliant upon this specific relationship.

Progress Prospects

Tootsie Roll Industries has had a tough time producing significant development over the previous decade. The corporate grew its income by solely 0.4% per yr on common between 2012 and 2021. Tootsie Roll doesn’t spend a fabric sum of money on analysis and growth, so future development goes to be pushed by natural gross sales development.

What the corporate has tried to do to generate some development is create seasonal improvements, in addition to new product extensions, just like the Andes bar that may be snapped aside into items. Its core merchandise don’t change a lot, so barring some form of significant acquisition, that is maybe the one avenue of quantity development as evidenced by years of stagnating income.

Nonetheless, inflation surged to a 40-year excessive final yr as a result of unprecedented fiscal stimulus packages provided by the federal government in response to the pandemic and the warfare in Ukraine. Tootsie Roll applied materials value hikes as a way to offset excessive price inflation. Consequently, the corporate grew its income and its earnings per share by 20% and 13%, respectively, final yr.

As talked about above, R&D isn’t actually a significant expense for Tootsie Roll. The one actual innovation comes from seasonal traces or product extensions, however these don’t drive transformational development.

Tootsie Roll reported second quarter earnings on July twenty fifth, 2023, and outcomes had been fairly sturdy. Income grew 12% over the prior yr’s quarter, from $142 million to $159 million, and earnings per share grew 24%, from $0.17 to $0.21.

The sturdy efficiency resulted primarily from materials value hikes, which greater than offset elevated prices for labor, commodities, freight, packaging supplies, and power prices. Regardless of the value hikes, volumes grew, thus signaling that the corporate has extra room for value hikes within the close to future.

One other catalyst for future earnings development is a renewed deal with effectivity within the manufacturing operations, in addition to sourcing initiatives that purpose to decrease price of products offered. There was some enlargement of gross margins over time, whereas the present inflationary surroundings has proved favorable for the corporate, which has raised costs with out upsetting its clients.

We count on 3% common annual earnings-per-share development over the following 5 years. Each time meals inflation subsides, traders ought to count on Tootsie Roll to revert to low development mode.

Aggressive Benefits & Recession Efficiency

Tootsie Roll’s aggressive benefits embrace its product line and its distribution partnerships. The corporate has constructed a distinct segment with its core Tootsie Roll line and its spin-offs like Tootsie Pops, in addition to the fruit-flavored variations of the basic sweet. Tootsie Rolls are not like another sweet out there – simply because it was over 100 years in the past when it launched – and that’s one thing that rivals can not replicate.

Tootsie Roll does, nevertheless, make a really slender assortment of sweet, with its largest departure from its core being the Harmony acquisition. Needless to say was almost twenty years in the past, so acquisitions aren’t a significant a part of the company technique.

On the similar time, the enterprise mannequin is pretty secure, which affords Tootsie Roll the nice fortune of being pretty immune to recessions, a key profit when contemplating a dividend inventory. The corporate’s earnings-per-share throughout and after the Nice Recession are under:

• 2007 earnings-per-share of $0.70
• 2008 earnings-per-share of $0.54 (lower of 23%)
• 2009 earnings-per-share of $0.75 (enhance of 39%)
• 2010 earnings-per-share of $0.76 (enhance of 1%)

Income fared very properly throughout this era because it by no means dipped greater than 1% from year-to-year, an astonishing accomplishment given the depths of the recession we skilled.

Nonetheless, margins carried out erratically resulting from enter prices, and the corporate’s revenue tax fee additionally moved round. That led to lumpy earnings, however on the entire, income was mainly flat and earnings fell however shortly recovered. We see inflationary enter prices as a key danger going ahead for earnings, although the corporate has offset this headwind with materials value hikes.

We proceed to see Tootsie Roll as a recession-resistant enterprise below most circumstances.

Valuation & Anticipated Returns

We presently count on Tootsie Roll to supply $1.13 in earnings-per-share for this yr, which suggests the inventory trades for a P/E ratio of 26.5. This earnings a number of is decrease than our assumed truthful P/E ratio of 30.0, which in flip is decrease than the 10-year common of 33.4 of the inventory.

If the inventory trades at our assumed truthful earnings a number of of 30.0 in 5 years, it would get pleasure from a 2.5% annualized valuation tailwind till 2028.

Tootsie Roll additionally offers a good stage of capital returns. The dividend yield is presently standing at 1.2% and, after all, it is extremely protected, given the stable payout ratio of 32%, the debt-free stability sheet, the resilience of the corporate to recessions and 56 consecutive years of dividend development.

And, the corporate points a 3% inventory dividend annually.

It is a little bit of an odd option to reward shareholders nowadays as inventory dividends are unusual, however the firm has been doing it for a very long time.

Basically, the corporate offers every shareholder a 3% capital return within the type of inventory, which might both be held or offered to create a money dividend of types. For the reason that inventory dividend is value 3%, if an investor sells the inventory dividend, the annual complete yield may very well be seen as north of 4%.

From a complete return perspective, given 3.0% anticipated development of earnings per share, the 1.2% dividend and a 2.5% annualized enlargement of valuation stage, the inventory might provide a 6.5% complete common annual return over the following 5 years.

Last Ideas

Tootsie Roll isn’t a high-yield dividend payer by any means but it surely does provide the quirky kicker of a 3% inventory dividend annually. That’s one thing traders don’t get in most locations and it may both be used to extend one’s stake in absolute phrases, or it may be offered to create a bigger money payout.

Nonetheless, the corporate has some elementary points that render its inventory considerably unattractive at its present value. Margins and earnings have tremendously improved within the inflationary surroundings prevailing proper now, however their stagnation for a complete decade, earlier than the surge of inflation, raises a crimson flag.

Plus, as sweet is a reasonably mature business within the U.S., it appears the inventory lacks significant development catalysts. Consequently, the inventory is just not prone to provide double-digit annual returns going ahead. We fee the inventory a maintain.