Income investors seek a steady stream of dividends. Tootsie Roll’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Tootsie Roll Industries (NYSE: TR) is a $2.5 billion business. The company is based out of Chicago and it employs 2,000 people. Last year Tootsie Roll Industries pulled in $519 million in sales and that works out to $259,000 per employee.
Tootsie Rolls are one of the most classic candies in American history. The company was founded in 1896 by Leo Hirshfield. The story goes that Hirshfield wanted a chocolate candy that wouldn’t melt in the heat. He came up with the formula and named the candy after the nickname of his daughter, Clara “Tootsie” Hirshfield.
On February 19 the board of directors declared a cash dividend of $0.09 per share. The dividend was made payable on March 26 to shareholders of record on March 5.
Tootsie Roll’s 10-Year Dividend History
The company paid investors $0.23 per share a decade ago. Over the last 10 years, the dividend has climbed to $0.35. That’s a 47% increase and you can see the annual changes below…
Aside from 2012’s Q4 special dividend of $0.50 per share, Tootsie Roll Industries’ dividend has grown slowly. At $0.09 per share, their dividend is small, but it seems to be steady.
The compound annual growth is 3.9% over 10 years… but over the last year, the dividend climbed 3%. The slowdown in dividend growth isn’t a great sign. Although, Tootsie Roll still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
Tootsie Roll’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 0.91% and that’s below the 10-year average of 1.2%. The chart below shows the dividend yield over the last 10 years…
Earnings have slowed since 2012 and the yield reflects that. The lower yield also shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So a payout ratio of 60% would mean that for every $1 Tootsie Roll earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety, but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here is Tootsie Roll’s payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is down. The payout ratio spiked in 2017 because the operating cash flow decreased. In 2016 Tootsie Roll had $82 million in free cash flow, but in 2017 the company reported only $26 million. That decreased free cash flow forces the payout ratio up. Fortunately, the last reported year shows a payout ratio of 31.5%. This gives wiggle room for Tootsie Roll’s board of directors to raise the dividend.
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Good investing,
Robert
