Updated on September 20th, 2023 by Aristofanis Papadatos
Tootsie Roll Industries (TR) has a dividend growth track record that few companies can rival. The company has increased its cash dividend for over 50 consecutive years, when including its annual stock dividend.
Its dividend history puts Tootsie Roll among the elite Dividend Kings, a small group of stocks that have increased their payouts for at least 50 consecutive years.
You can see the full list of all 50 Dividend Kings here.
In addition, we created a list of all Dividend Kings, along with important financial metrics such as dividend yields and price-to-earnings ratios.
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Dividend Kings are the “best of the best”, when it comes to rewarding shareholders with cash.
Tootsie Roll Industries has a long history of dividend growth, but the current yield is relatively low at 1.2%. Therefore, it is not a highly appealing stock for income.
This article will discuss Tootsie Roll’s dividend and valuation outlook.
Tootsie Roll traces its roots back to 1896 when Leo Hirschfield began selling his candy from a family recipe in his shop in Brooklyn. He then went to work for The Stern & Saalberg Company, which later became The Sweets Company of America, and eventually morphed into the enterprise we know today.
The company’s history of innovation when it comes to candy products began with Hirschfield’s inventive mind creating various patents surrounding the way candies are made and indeed, the very texture of the company’s signature Tootsie Roll. That spirit of innovation was key to Tootsie Roll’s beginning and its subsequent growth, something that was helped along by two world wars.
Tootsie Roll saw tremendous growth and mainstream adoption of its candies during World War 1 and World War 2 as Tootsie Rolls were added to military rations, owed to their very tough texture that could remain firm anywhere soldiers could go.
While WW1 and WW2 were horrible events in human history, they helped make Tootsie Roll into what it is today. To its credit, the company seized the opportunity to supply its treats to the US military and that relationship continues through today.
Tootsie Roll’s market capitalization is $2.1 billion, and the company produces about $725 million in annual revenue.
The vast majority of sales are made in the US but the company does sell its products in Canada and Mexico as well. Tootsie Roll sells its products through a network of ~4,000 customers that include wholesalers, discount chains, dollar stores, supermarkets, the US military and others. It also sells its products directly to consumers through its website.
Tootsie Roll’s brands have grown over the years from the original Tootsie Roll to various spin-offs of that brand, as well as entirely new lines.
The company branched out into bubble gum with its 2004 acquisition of Concord Confections; it also makes lollipops of various types and some chocolate products as well. Although Tootsie Roll has moved into some different candy products, it still has a very narrow focus and while that allows it to be very good at what it does, it also means growth opportunities are limited, as evidenced by its years of essentially no growth.
Tootsie Roll certainly has its niche built out in the world of candy, but it is not without its risks. First, it is beholden to commodity prices, just like any other candy maker.
Tootsie Roll obviously buys a lot of sugar and corn syrup and hence the swings in the prices of these commodities can significantly impact the company’s profitability. Tootsie Roll occasionally hedges the prices of these commodities but it cannot escape the fact that it is subject to the whims of the markets in which these and other commodities trade.
Tootsie Roll also has largely fixed operating costs at its manufacturing facilities. As a result, when revenue declines, profitability suffers.
In addition, there is also the matter of Tootsie Roll’s dual class structure, and the fact that it is run essentially like a private company by the Gordon family. The family controls the vast majority of the voting rights of Tootsie Roll, so the company is under complete control, just as it would be if it were private.
Therefore, as long as the Gordon family is in charge, it appears Tootsie Roll is going to simply maintain status quo instead of chasing growth opportunities or a sale of the company.
Tootsie Roll possesses a long list of customers but it is particularly reliant upon Walmart (WMT), which accounts for about one-quarter of the company’s total revenue.
That is an enormous reliance upon one customer. While it means that Tootsie Roll has a great relationship with Walmart, it also means that should Walmart decide to dedicate valuable shelf space to a different product, Tootsie Roll could lose a tremendous amount of revenue.
The company’s relationship with Walmart has grown over the years so this isn’t a serious risk, but it is certainly something for investors to watch given that Tootsie Roll is so reliant upon this particular relationship.
Tootsie Roll Industries has had a hard time producing meaningful growth over the past decade. The company grew its revenue by only 0.4% per year on average between 2012 and 2021. Tootsie Roll does not spend a material amount of money on research and development, so future growth is going to be driven by organic sales growth.
What the company has tried to do to generate some growth is create seasonal innovations, as well as new product extensions, like the Andes bar that can be snapped apart into pieces. Its core products don’t change much, so barring some sort of meaningful acquisition, this is perhaps the only avenue of volume growth as evidenced by years of stagnating revenue.
However, inflation surged to a 40-year high last year due to the unprecedented fiscal stimulus packages offered by the government in response to the pandemic and the war in Ukraine. Tootsie Roll implemented material price hikes in order to offset high cost inflation. As a result, the company grew its revenue and its earnings per share by 20% and 13%, respectively, last year.
As mentioned above, R&D isn’t really a meaningful expense for Tootsie Roll. The only real innovation comes from seasonal lines or product extensions, but those don’t drive transformational growth.
Tootsie Roll reported second quarter earnings on July 25th, 2023, and results were quite strong. Revenue grew 12% over the prior year’s quarter, from $142 million to $159 million, and earnings per share grew 24%, from $0.17 to $0.21.
The strong performance resulted primarily from material price hikes, which more than offset increased costs for labor, commodities, freight, packaging materials, and energy costs. Despite the price hikes, volumes grew, thus signaling that the company has more room for price hikes in the near future.
Another catalyst for future earnings growth is a renewed focus on efficiency in the manufacturing operations, as well as sourcing initiatives that aim to lower cost of goods sold. There has been some expansion of gross margins over time, while the current inflationary environment has proved favorable for the company, which has raised prices without upsetting its customers.
We expect 3% average annual earnings-per-share growth over the next five years. Whenever food inflation subsides, investors should expect Tootsie Roll to revert to low growth mode.
Competitive Advantages & Recession Performance
Tootsie Roll’s competitive advantages include its product line and its distribution partnerships. The company has built a niche with its core Tootsie Roll line and its spin-offs like Tootsie Pops, as well as the fruit-flavored versions of the classic candy. Tootsie Rolls are unlike any other candy in the market – just as it was over a hundred years ago when it launched – and that is something that competitors cannot replicate.
Tootsie Roll does, however, make a very narrow assortment of candy, with its biggest departure from its core being the Concord acquisition. Keep in mind that was nearly two decades ago, so acquisitions are not a major part of the corporate strategy.
At the same time, the business model is fairly stable, which affords Tootsie Roll the good fortune of being fairly resistant to recessions, a key benefit when considering a dividend stock. The company’s earnings-per-share during and after the Great Recession are below:
- 2007 earnings-per-share of $0.70
- 2008 earnings-per-share of $0.54 (decrease of 23%)
- 2009 earnings-per-share of $0.75 (increase of 39%)
- 2010 earnings-per-share of $0.76 (increase of 1%)
Revenue fared very well during this period as it never dipped more than 1% from year-to-year, an astonishing accomplishment given the depths of the recession we experienced.
However, margins performed erratically due to input costs, and the company’s income tax rate also moved around. That led to lumpy earnings, but on the whole, revenue was basically flat and earnings fell but quickly recovered. We see inflationary input costs as a key risk going forward for earnings, though the company has offset this headwind with material price hikes.
We continue to see Tootsie Roll as a recession-resistant business under most circumstances.
Valuation & Expected Returns
We currently expect Tootsie Roll to produce $1.13 in earnings-per-share for this year, which means the stock trades for a P/E ratio of 26.5. This earnings multiple is lower than our assumed fair P/E ratio of 30.0, which in turn is lower than the 10-year average of 33.4 of the stock.
If the stock trades at our assumed fair earnings multiple of 30.0 in five years, it will enjoy a 2.5% annualized valuation tailwind until 2028.
Tootsie Roll also provides a decent level of capital returns. The dividend yield is currently standing at 1.2% and, of course, it is very safe, given the solid payout ratio of 32%, the debt-free balance sheet, the resilience of the company to recessions and 56 consecutive years of dividend growth.
And, the company issues a 3% stock dividend each year.
This is a bit of a strange way to reward shareholders these days as stock dividends are uncommon, but the company has been doing it for a long time.
Essentially, the company gives each shareholder a 3% capital return in the form of stock, which can either be held or sold to create a cash dividend of sorts. Since the stock dividend is worth 3%, if an investor sells the stock dividend, the annual total yield could be viewed as north of 4%.
From a total return perspective, given 3.0% expected growth of earnings per share, the 1.2% dividend and a 2.5% annualized expansion of valuation level, the stock could offer a 6.5% total average annual return over the next five years.
Tootsie Roll isn’t a high-yield dividend payer by any means but it does offer the quirky kicker of a 3% stock dividend each year. That’s something investors don’t get in most places and it can either be used to increase one’s stake in absolute terms, or it can be sold to create a larger cash payout.
However, the company has some fundamental issues that render its stock somewhat unattractive at its current price. Margins and earnings have greatly improved in the inflationary environment prevailing right now, but their stagnation for a whole decade, before the surge of inflation, raises a red flag.
Plus, as candy is a fairly mature industry in the U.S., it seems the stock lacks meaningful growth catalysts. As a result, the stock is not likely to offer double-digit annual returns going forward. We rate the stock a hold.
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