Tootsie Roll: The Dividend King I Am Not Buying

Jul. 19, 2020 11:08 AM ETTootsie Roll Industries, Inc. (TR)8 Comments
Vasily Zyryanov profile picture
Vasily Zyryanov
1.86K Followers

Summary

  • TR is a dividend king with 53 consecutive years of dividend increases.
  • The company's growth story stalled in the 2010s, while FCF and profit were volatile.
  • Though consistent FCF growth trend is not observable, TR's cash surplus is surfeit enough to fully cover total shareholder rewards.
  • TR has an exceedingly strong, almost debt-free balance sheet reinforced with a cash pile.
  • I am neutral, as the yield is meager, while growth prospects are uncertain.

A confectionery company Tootsie Roll Industries, Inc. (NYSE:TR) had been increasing its dividend per share for more than 50 consecutive years; the stock was awarded a dividend king title. For novice income-oriented investors, building a portfolio of dividend aristocrats/kings/champions, especially from recession-immune industries, is considered to be a relatively low risk but also lucrative strategy. At first glance, TR is an almost perfect low-risk investment to consider, given the non-cyclicality of its confectionery business and the track record of dividend hikes that survived a few recessions that most public companies can only envy.

Unfortunately, Tootsie Roll lacks growth potential and has poor value, and I have to acknowledge that a compelling dividend investment thesis cannot be created here. In the article, I will expound on why I would not consider investing in TR, as the unattractive, close to 1% dividend yield is not the only issue the stock has.

Forget about cyclicality, but also about revenue growth

Tootsie Roll Industries has a vast portfolio built during its over 100-year history, including registered trademarks like TOOTSIE POPS, CHARMS, DOTS, and a plethora of others. The company has a dual capital structure: common stock and Class B common stock.

Source: UnsplashSource: Unsplash

Though it also generates sales in Canada and Mexico, the U.S. remains its flagship market. As anecdotal evidence suggests, confectionery business is highly lucrative, as sweets and chocolate are among the staples of a modern diet. But the first issue with Tootsie is that though the business is not in decline in the wake of the pandemic (investors appreciated it, considering that during the gloomiest days in March, the stock price was immune to the overall market panic), it is also not growing, at all.

Yet its poor (0.49)% five-year sales CAGR had not hindered the stock from delivering a

ChartData by YCharts

This article was written by

Vasily Zyryanov profile picture
1.86K Followers
Vasily Zyryanov is an individual investor and writer.He uses various techniques to find both relatively underpriced equities with strong upside potential and relatively overappreciated companies that have inflated valuation for a reason.In his research, he pays much attention to the energy sector (oil & gas supermajors, mid-cap, and small-cap exploration & production companies, the oilfield services firms), while he also covers a plethora of other industries from mining and chemicals to luxury bellwethers.He firmly believes that apart from simple profit and sales analysis, a meticulous investor must assess Free Cash Flow and Return on Capital to gain deeper insights and avoid sophomoric conclusions.While he favors underappreciated and misunderstood equities, he also acknowledges that some growth stocks do deserve their premium valuation, and its an investor's primary goal to delve deeper and uncover if the market's current opinion is correct or not.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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