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Dividend Kings In Focus: Tootsie Roll Industries


Updated on October 24th, 2024 by Felix Martinez

Tootsie Roll Industries (TR) has a dividend growth track record that few companies can rival. The company has increased its cash dividend for over 58 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 53 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.

Business Overview

Tootsie Roll traces its roots back to 1896 when Leo Hirschfield began selling candy made 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 in 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 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 WWI and WW2 were horrible events in human history, they helped make Tootsie Roll what it is today. To its credit, the company seized the opportunity to supply its treats to the US military, and that relationship continues today.

Tootsie Roll’s market capitalization is $2.2 billion, and the company produces about $769 million in annual revenue.

The vast majority of sales are made in the US, but the company also sells its products in Canada and Mexico. Tootsie Roll sells its products through a network of ~4,000 customers, including 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 and entirely new lines.

The company branched out into bubble gum with its 2004 acquisition of Concord Confections; it also makes various types of lollipops and some chocolate products. Although Tootsie Roll has moved into some different candy products, it still has a very narrow focus. 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, 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, Tootsie Roll appears to be going to simply maintain the status quo instead of pursuing growth opportunities or selling the company.

Tootsie Roll has a long list of customers but 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.

Growth Prospects

Tootsie Roll Industries has struggled to produce meaningful growth over the past decade. Between 2012 and 2023, the company grew its revenue by only 4.5% per year on average. Tootsie Roll does not spend a material amount of money on research and development, so future growth will be driven by organic sales growth.

The company has tried to generate some growth by creating seasonal innovations and 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 to offset high cost inflation. As a result, the company grew its revenue and earnings per share by 13% and 22%, 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.

The company reported its financial results for the third quarter and first nine months of 2024, showing a decline in sales and earnings compared to 2023. Third-quarter net sales dropped by 10%, falling to $223.9 million, while net earnings decreased by 4% to $32.8 million. For the nine-month period, net sales declined by 8% to $524.2 million, though net earnings improved slightly, rising by 3% to $64.3 million, primarily due to cost management efforts.

Chairman Ellen R. Gordon highlighted the challenges in 2024, particularly customer resistance to price increases and lower sales volumes. While the company benefited from higher prices and better manufacturing efficiency, fixed costs like overhead remained a drag due to reduced sales. Price increases have helped restore profit margins, but rising costs for key inputs like cocoa and chocolate are expected to continue pressuring the company’s margins into late 2024 and 2025.

Despite the challenges, Tootsie Roll saw gains in investment income, real estate leasing, and foreign exchange, contributing to net earnings. The company also benefited from a lower effective tax rate and fewer outstanding shares due to stock buybacks. The company remains committed to long-term investments in its manufacturing capabilities to improve product quality, expand capacity, and increase operational efficiencies.

We expect a 3% average annual earnings-per-share growth over the next five years. Investors should expect Tootsie Roll to revert to low growth mode whenever food inflation subsides.

Competitive Advantages & Recession Performance

Tootsie Roll’s competitive advantages include its product line and 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 they were over a hundred years ago when they launched—and that is something that competitors cannot replicate.

Tootsie Roll does, however, make a very narrow assortment of candy. The biggest departure from its core was the Concord acquisition, which occurred nearly two decades ago. Keep in mind that 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:

Revenue fared very well during this period, never dipping 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 overall, 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 expect Tootsie Roll to produce $1.36 in earnings per share this year, which means the stock trades for a P/E ratio of 22.1. This earnings multiple is lower than our assumed fair P/E ratio of 30.0, which 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 6% annualized valuation tailwind until 2029.

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 26%, the debt-free balance sheet, the company’s resilience to recessions, and 58 consecutive years of dividend growth.

The company also issues a 3% stock dividend each year.

This is 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 the 3.0% expected growth of earnings per share, the 1.2% dividend, and a 6% annualized expansion of valuation level, the stock could offer a 10.2% total average annual return over the next five years.

Final Thoughts

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 sold to create a larger cash payout.

However, the company has some fundamental issues that render its stock somewhat unattractive at its current price. Although margins and earnings have greatly improved in the current inflationary environment, 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 likely to offer double-digit annual returns going forward. We rate the stock a buy.

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.



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