Income investors seek a steady stream of dividends. With a long dividend history, Toro might make a great addition to an income portfolio. Let’s take a look at Toro’s business, dividend history, and payout safety going forward.
Business Overview and Highlights
The Toro Company (NYSE: TTC) is a $7.4 billion business based out of Minnesota. The company has 6,134 full time employees. Last year Toro pulled in $2.6 billion in sales, and their global presence extends to more than 125 countries.
Toro manufactures turf maintenance, snow removal, and irrigation equipment. Their products are for commercial and residential use. The company operates within the consumer sector and maintains a solid credit rating (BBB) from the S&P. This allows Toro to issue cheap debt to grow the business and pay dividends.
On March 19th Toro declared a quarterly dividend of $0.225 per share. The dividend will be made payable April 12, 2019 to stockholders of record on April 1, 2019.
10-Year Dividend History
The company paid investors $0.15 per share a decade ago. Over the last 10 years, the dividend has climbed to $0.80. That’s a 433% increase and you can see the annual changes below…
The compound annual growth is 18.2% over 10 year, but over the last year, the dividend climbed 14.3%. The slowdown in dividend growth isn’t a great sign. Although, Toro still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
Toro’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 1.28% and that’s below the 10-year average of 1.43%. The chart below shows the dividend yield over the last 10 years…
You can see the yield start to decline around 2009 due to the financial crisis. The yield has been relatively stable hovering around 1.3% since then. The lower yield 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 Toro 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. Free cash flow is a better metric.
Here is Toro’s payout ratio based on free cash flow over the last 10 years…
The ratio appears volatile over the last 10 years and the trend is up. According to MorningStar, 2011 and 2014 are more anomalies than trend indicators. In those years Toro had lower operating cash flow, and higher capital spending totals. Since 2014, their net income has climbed steadily and free cash flow has remained stable. The last reported year shows a payout ratio of 31%. This gives wiggle room for Toro’s board of directors to raise the dividend. Toro’s stability the last few years suggests they are a safe bet for dividend investors.