As October begins, it may be time to begin looking toward the holiday season. After all, retailers are beginning to announce plans for holiday season hiring and new seasonal layaway policies. With the holiday season ahead of us, it felt only appropriate to look toward the next holiday we will be celebrating. Halloween is less than a month away, and for many families, this will mean buying costumes and candy to get ready. With candy on the brain, I thought why not take a look at some of the candy companies DGI investors can look at to sweeten their DGI portfolios?
Tootsie Roll Industries, Inc. (TR)
Best known for producing Tootsie Rolls and Tootsie Pops, this confectioner has expanded its brand offerings over the years through acquisitions. The TR portfolio now includes additional brands, such as Charleston Chew, Dubble Bubble bubble gum, and Charms Blow Pops. TR is a difficult company to assess as the CEO, Melvin Gordon, and his wife Ellen Gordon, have seemingly shut the company off to the world of investors and analysts. (More about that here).
What can be said about TR is that it is a reliable company, having increased its annual dividend payment for 47 years. The downside of this dividend growth story is that the company has raised the dividend by just 3% annually over the last five years. Greater dividend growth would be expected from most companies like TR, with very low debt and a payout ratio of 41%.
With the limited information coming out of TR, it is difficult to suggest that anyone should jump into TR stock. With a market cap of just $1.5B, TR could make an attractive acquisition target for a larger food and candy manufacturer, but with Melvin Gordon at the helm, it is impossible to predict what may happen. An acquisition would likely be the best way for investors in TR to see any significant gain in share price, but it seems unlikely that Mr. Gordon would be willing to relinquish control of the company during his lifetime. Tootsie Roll Industries has provided investors with reliable and increasing dividends, but lacks the dividend growth and capital appreciation that most DGI investors are interested in.
The Hershey Company (HSY)
The manufacturer of the iconic American chocolate bar, and the largest chocolate manufacturer in North America, has a market cap of just under $12B. The company, which also manufactures Mounds, Almond Joy, Kit Kat, and Reese's Peanut Butter Cups, brings in $6B in revenue annually. Earnings per share for the company come in slightly under $3, with estimated growth of near 10% for the next five years. With a focus on increasing exposure overseas, HSY could potentially outpace the current long term EPS projections and grow rapidly. Hershey's annual dividend of $1.52 equates to a yield of 2.12%, based on today's share price of $71.68. The company has also increased its dividend in 36 out of the last 37 years, after having frozen the dividend in 2009.
In the past five years, HSY has gone on a tremendous run, increasing its share price nearly 56%, and raising its dividend by 28%. However, while the share price has gone up significantly over those five years, the company has actually reduced its P/E ratio from a high of near 45 down to 24.4, where it stands today.
HSY has been able to exceed industry averages across all margin categories, but carries significant debt on the balance sheet. With Long Term Debt equal to 175% of equity, and a current ratio of 1.55, investors should look closely at HSY's financials before deciding if this stock is a buy.
Mondelez, the global foods company, and Kraft Foods Group, the North American Grocery business -- created when Kraft Foods (KFT) split into two independent companies -- are intriguing plays for DGI investors. With a focus on the lower-growth North American grocery business, KRFT will be the primary dividend growth stock. Mondelez, consisting of Kraft Europe, Emerging Markets, and the North American Confections and Snacks business, represents a much greater growth opportunity. The Kraft Confections business includes brands like Swedish Fish, Sour Patch Kids, Stride Gum, as well as Cadbury Chocolate products outside the U.S.
It is difficult to truly assess MDLZ and KRFT for valuation, as the split was just completed at the end of September. Based upon some preliminary estimates, MDLZ is expected to have Operating income near $4.0B, and KRFT expects operating income around $3.0B.
While uncertainty surrounds the current valuations and dividend policies of the newly formed companies, these stocks could certainly evolve into quality dividend payers. For investors who were holding KFT stock prior to the split, it would likely be a wise move to remain invested and see how management at the two entities returns value to shareholders. For investors on the sidelines, it may be best to wait for more clarity on the operations of the two newly independent companies before jumping in.
While Halloween is generally thought to be a children's holiday, this month leading up to it will provide time for investors to take a close look at confectioners' stocks. TR would likely provide investors with a steady and slowly increasing dividend stream, but there just isn't enough there to get me excited to make a purchase. KRFT and MDLZ may represent the two best buying opportunities, but personally, I would wait for more clarity on how the two companies are operating. I would love to get involved MDLZ if I knew it would be paying a dividend and increasing it annually, but at this time, that is unclear. In my opinion, HSY looks like the best of the stocks discussed, and could bolster most dividend growth portfolios. I would look to make an entry into HSY if the stock were to pull back to $65.
Investors interested in making plays in the sweet and sugary portions of the stock market should scrutinize the companies closely to determine which stocks are tricks, representing value traps, and which stocks will provide treats such capital appreciation and growing dividends.